A semiconductor device has an encapsulant deposited over a first surface of the semiconductor die and around the semiconductor die. A first insulating layer is formed over a second surface of the semiconductor die opposite the first surface. A conductive layer is formed over the first insulating layer. An interconnect structure is formed through the encapsulant outside a footprint of the semiconductor die and electrically connected to the conductive layer. The first insulating layer includes an optically transparent or translucent material. The semiconductor die includes a sensor configured to receive an external stimulus passing through the first insulating layer. A second insulating layer is formed over the first surface of the semiconductor die. A conductive via is formed through the first insulating layer outside a footprint of the semiconductor die. A plurality of stacked semiconductor devices is electrically connected through the interconnect structure.