Ultimately, this fellow is very easy to kill in terms of simple mechanics. Yep. That's the point.
It may be an immensely powerful child with control over nightmares, fear and your very psyche, but it is still a child. Stabbing a child in the chest will kill it.
As a side-note, nobody has considered that when confronted by people trying to kill it the Child can detect thoughts and polymorph itself into the image of one of its attacker's own children, provided they have been lost or taken in some way as well? You'd be surprised at how effective that is at giving someone pause.
As for the phantasmal horrors at will, I decided to go with that rather than a per-day limit because it has pretty much no other attacks. It doesn't consider its touch attack an attack, so instead I gave it one that does 3d6 damage to anything that is capable of feeling fear.
(Which means if it goes up against undead or a Paladin it is bleeped.)