In this case, 'it' doesn't actually refer to the person. It refers to the concept. Here's an example:
If we're talking about someone present, you'd call them 'you' or by name.
If we're talking about someone who is not present, you'd generally use 'he' or 'she'.
But consider cases where you aren't talking directly about the person, but about a concept of the person, or a representation of a person. Consider someone at the door: "who is it". "it is me, your sister!" In this case, we're not really talking strictly about who the person is. We're talking about who is at the door. This quickly becomes an abstract concept, rather than a direct reference to the person themselves.
In your example, I assume that the dialogue is based around looking at photos / pictures of family members. When pointing to a picture of a person, it is natural to refer to the picture as 'it', because it a representation of a person, not a real present person. If I were to meet their sister in person, I could ask the same question: "Who is this?", but your answer would definitely NOT be "it is my sister" in the presence of your sister. You'd say "she is my sister", or "this is my sister".
The difference is subtle. In the case of a concept of a person, consider that the person at the door, on the phone, or in the picture is not (or not yet) present in person, so they're represented by an idea of a person. "There's a person on the phone." "Who is it?" you see that the 'it' really refers to the concept of "the person who is on the phone", not "the person that is here in front of me that I'm referring to directly". It can quickly become demeaning to call people 'it' when they're in the room, but as soon as they transition from a real presence into a distant concept, that concept is really what's being referred to with 'it', not strictly the person themselves.