A semiconductor device includes a semiconductor wafer including a plurality of first semiconductor die. An opening is formed partially through the semiconductor wafer. A plurality of second semiconductor die is disposed over a first surface of the semiconductor wafer. An encapsulant is disposed over the semiconductor wafer and into the opening leaving a second surface of the semiconductor wafer exposed. A portion of the second surface of the semiconductor wafer is removed to separate the first semiconductor die. An interconnect structure is formed over the second semiconductor die and encapsulant. A thermal interface material is deposited over the second surface of the first semiconductor die. A heat spreader is disposed over the thermal interface material. An insulating layer is formed over the first surface of the semiconductor wafer. A vertical interconnect structure is formed around the first semiconductor die. Conductive vias are formed through the first semiconductor die.