I'm very sorry for your loss. My mother-in-law died this morning of lung cancer and I had to tell my 4.5 yr old daughter. We had a cat that was hit by a car last year, so we had been visiting the subject for a while.
I had contacted a grief counselor at Olivias House, where they specialize in Children's losses. They said children don't understand abstracts such as "She is in heaven" or "She is with God". The best approach is short honest answers. First, define death - no more sleeping, no more eating, no more seeing, hearing, talking, etc. Then explain that they won't see grandmother anymore but they can think of her anytime, and if appropriate in your opinion, remember her with flowers at the gravesite, etc. DO NOT, under ANY circumstances, allow anyone to tell the children that she is sleeping or has "gone to her eternal resting place". This can cause fear of going to bed. Also, it is helpful to be very specific that she died from cancer, NOT that she was sick. Otherwise, they may fear that they will die or that you or someone else may die from something like a cold or the flu. If they ask questions, give them short, specific, age appropriate responses. Children are usually asking a very specific question so really listen to them.
I hope that helps. It's already a tough time and explaining things to them isn't easy. Let them see you grieve and tell them that people will be sad about this. One thing to keep in mind that I've experienced already this morning, they will say things that sound odd, cold, and out of place since this is their first experience with death. Also, they may not immediately be sad or may be sad very breifly and move on. Be patient as possible.