My step-dad had cancer last year (a different type though) and was diagnosed after being suddenly ill with a chest infection.
I told my dc, who were 3&4 at the time, in very simple terms that he was poorly and that his lungs weren't working properly but the drs were giving him medicine to try and make him better (I knew it was terminal but didn't tell them that at that stage because he actually seemed quite well and normal (he still worked and went on daytrips etc but the chemo made him a lot more tired than normal)).
If you can get over to see your FIL, do so quite soon because how long your FIL actually has is really very difficult to say; my s-d's death came very quick and sudden so he didn't have that long, slow decline that's associated with a terminal illness. He was initially given up to 2 years but actually only made it to 2 months.
Be as honest as you can with your children - simplify it but don't hide the truth because they know when something is wrong and I think get more scared and unsettled when they're gone everything is alright when it's not. When my s-d died, I told my dc that he'd gone to hospital. Ds, 4 at the time, asked if he was going to die and I said yes, he probably was; the medicine wasn't helping very much and that his lungs had stopped working. They didn't see him die (I thought that would have been too much for them) but I told them as soon as I could and answered their questions as they asked them. I took their lead in that way.
They still ask about him and get upset that he's not here. The only thing I can do is give them a cuddle and say that we still think about him and remember him so that his memory is still with us. We go to church every now and then and light a candle for him and we wrote him a card when it was his birthday.
I don't know how much this is helping you but I thought I'd write a bit about my experience because my dc are of a similar age to yours. Sorry to read that you and your family are going through this and holes that your FIL responds to treatment and is as well as he can be.