Personally, I give little kids a lot of credit for understanding or the ability to understand more than we think they can. I say teach them what you know to be true. This is how I would explain the notion of soul to a 3rd grader:
the soul is the thing which breaths us and gives us all life. We all have part of the same soul in us and when it leaves the body, to go back to its true home, the body has no power. True home is where our soul lives in between lifetimes.
I would also say that we need to sleep and dream each night so that our soul can connect with our true home for a little bit to keep us healthy. I think these are important elements to mention to give a rounded understanding because kids are smart and they think about things.
This is basic information about who we are and essential to understanding Self.
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