I love that story! And your response to him saying that is perfect. Zero judgement, but making sure everything is okay.
Regarding preschool and day care, that is insane. My first step would be to choose a daycare and/or preschool that is body positive and doesn’t shame children for knowing their bodies. I would also try to find one where I trusted if they had ANY concerns about my child, they’d talk to me first.
It could be partially cultural and depend on where in the country you live, but if DHS had a problem with my child knowing the correct words for their body parts, I’d provide them with studies that show it is actually better for kids to know that stuff.