in Judaism. If you do not understand, it is prudent to first make polite inquiries before making assumptions.

The concept of "chosen people" is basically just the belief of the existence of obligations exclusive to Jews, while non-Jews receive from God other covenants and other responsibilities. Generally, it does not entail exclusive rewards for Jews. Essentially, we Jews have to do more for the same rewards as everyone else. It's hardly a belief in ethnic or religious superiority among the vast majority of Jews, religious or otherwise, but it does imply we should treat everyone else with respect and even altruism.

http://en.wikipedia.org/wiki/Jews_as_the_chosen_people

I also would not care one iota if Muslims claimed "they are God's children." I am not an Islamic scholar, it would have absolutely nothing to do with me, or effect my own spiritual relationship with God, unless of course, such Muslim's belief included committing violence against me or other Jews.