A semiconductor device has a semiconductor die with an encapsulant deposited over the semiconductor die. A first insulating layer having high tensile strength and elongation is formed over the semiconductor die and encapsulant. A first portion of the first insulating layer is removed by a first laser direct ablation to form a plurality of openings in the first insulating layer. The openings extend partially through the first insulating layer or into the encapsulant. A second portion of the first insulating layer is removed by a second laser direct ablation to form a plurality of trenches in the first insulating layer. A conductive layer is formed in the openings and trenches of the first insulating layer. A second insulating layer is formed over the conductive layer. A portion of the second insulating layer is removed by a third laser direct ablation. Bumps are formed over the conductive layer.