I am so sorry to hear of your husband's passing. May God comfort you among the other mourners of Zion and may you and your entire family know no more sorrow.
I truly empathize with your granddaughter. However hard it is for her right now it is obviously a beautiful indication of just how close she felt to her grandfather, which I hope will be a source of comfort for you and your family. What should she be told? Many years ago I went through something very similar with my daughter when my father passed away. We felt that the best approach was to explain to her the difference between the body and the soul. We explained that the soul is always the infinite dimension of the person. We told her that the soul lives forever and is now together with God in the heavenly realms. We explained to her (in a way that was applicable for a younger child) that the body is only given to us to keep the soul in and to let the soul be together with us in the physical world and in the future God will reunite the body and soul in a way that we don’t understand right now. We then emphasized to her very gently that her beloved grandfather is watching over her from his special place and that he will never forget her. While I appreciate that every child is different and each child needs their own approach we found that that approach was the one that was right for our daughter.
May God grant you the insight to say the right words at the right time.