definitely agree with erin, be honest.
answer questions, always be honest - including "i don't know", and keep in mind that at this age, kids tend to personify death, in the form of ghosts, skeletons, ghouls, bogeymans, angel of death, etc.
if she is at that stage, hopefully she will see grandpa as an angel.
if your dtr doesn't know anything now, i'm not sure if she needs to know about his impending death...
only that he is very sick and hurting.
then, when the time comes, you will be able to tell her that he died, is no longer hurting and feels all better now.
sharing your spiritual beliefs, can be very helpful as well.
as for the physical body not being there after death, it sometimes helps to tell kids, that love cannot be seen, only felt.
so even though she can't see grandpa anymore, she can feel him when she thinks about him.
your dtr sounds like an intelligent young lady.
prayers for peace and faith.