Firstly, I am sorry for the loss of your grandparents. You must feel that loss keenly yourself, which makes it very difficult to know how to deal with your kids without falling apart.
But I agree with PPs - be honest. It is likely to hurt your child less than the notion that the relative has gone somewhere but just doesn't want to see them anymore, KWIM?
IMO, death doesn't have to be scary. I believe if we are honest and open about it, about how it is part of a cycle of life at the very least, that we can be peaceful about it. I also have faith that there is life beyond death (although if I didn't believe that I probably wouldn't teach it to my kids, I suppose). That isn't to say you have to deny your sadness over it - when someone dies it is extremely sad for us who miss them.
Being open about it can also teach kids compassion for others who lose relatives, and will help them not to shy away from those people if/when something like that happens to their friends.
DH's mate lost his dad in high school and he remembers the worst thing was that no one spoke to him - they were all too afraid, didn't know what to say. He just wished someone would say, "I'm sorry your Dad died. You must be sad," or something.

I hope you are able to find the words.