A semiconductor device has a first insulation layer formed over a sacrificial substrate. A first conductive layer is formed over the first insulating layer. Conductive pillars are formed over the first conductive layer. A pre-fabricated IPD is disposed between the conductive pillars. An encapsulant is formed around the IPD and conductive pillars. A second insulation layer is formed over the encapsulant. The conductive pillars are electrically connected to the first and second conductive layers. The first and second conductive layers each include an inductor. Semiconductor devices are mounted over the first and second insulating layer and electrically connected to the first and second conductive layers, respectively. An interconnect structure is formed over the first and second insulating layers, respectively, and electrically connected to the first and second conductive layers. The sacrificial substrate is removed. The semiconductor devices can be stacked and electrically interconnected through the conductive pillars.