"The insect is in the butter."
Translation:L'insetto è nel burro.
No, zucchero is singular as well, although uncountable; as most uncountables it does have a plural, used for "different kinds of", and it's zuccheri. What discriminates between il, lo and its elision l', is the letters following the article; it's "lo" before z, s+consonant, i+vowel, gn, ps, pn, x, j. If you know what article is needed, the preposition compound follows automatically: il -> nel, lo -> nello, l' -> nell'.
They gave you an option to choose dentro? I didn't get that as an option..that's odd. Is every phone set up differently with duo-lingo. Also i'm almost certain "L'insetto è nel burro" is correct, but I'm assuming since you spelled what you said correctly. It is assuming it to be the same delivery. Did it also correct you in some way?