From what Microsoft's said, it's less about profanity and more about taking down things like serious threats, doxxing/stalking, etc. I have no issue with moderating that, and I'm glad it's (at least in theory) not being used as a filter to keep everything that happens in Minecraft G-rated since a lot of more mature people play it. I think implementing a game-wide ban on a community that's spread across thousands of individual servers has the potential to cause so much harm if someone makes a mistake or there's a glitch, not to mention trolls gaming the system to get people they don't like banned. Content moderation at scale is impossible, and considering Minecraft's still one of the biggest games in the world, mistakes will be made.

As an aside, have you looked into putting a whitelist on your server? It could provide a lot of peace of mind, especially when you're trying to keep it to just your kids and friends.