A semiconductor device is made by forming a first conductive layer over a sacrificial carrier. A conductive pillar is formed over the first conductive layer. An active surface of a semiconductor die is mounted to the carrier. An encapsulant is deposited over the semiconductor die and around the conductive pillar. The carrier and adhesive layer are removed. A stress relief insulating layer is formed over the active surface of the semiconductor die and a first surface of the encapsulant. The stress relief insulating layer has a first thickness over the semiconductor die and a second thickness less than the first thickness over the encapsulant. A first interconnect structure is formed over the stress relief insulating layer. A second interconnect structure is formed over a second surface of encapsulant opposite the first interconnect structure. The first and second interconnect structures are electrically connected through the conductive pillar.