Power of attorney is simply the power to make legally-binding decisions on behalf of another person. For example, parents have power of attorney over their minor children, and are typically able to make decisions on their behalf. If an adult becomes incapacitated, their spouse often automatically gets power of attorney, in order to make decisions regarding their medical care.
However, in situations where it does not automatically arise, it might be advantageous for one person to grant power of attorney to another. For example, suppose you want to buy a piece of real estate that's on the other side of the country, and you have a trusted friend or family member who lives near it. Rather than traveling across the country to sign a few papers, you could grant power of attorney to a trusted third party, and they can sign all the required documents on your behalf, and it will be just as legally-binding as if you had done it yourself.
There are many other situations in which you might want to grant power of attorney. For example, you could grant power of an attorney to your spouse, to make all of your financial decisions for you, in the event that you become completely incapacitated, and unable to make your own decisions.
The Types of Power of Attorney
There are several different forms of power of attorney. The most common is "limited" power of attorney. Limited power of attorney, as the name implies, is limited in scope. It typically gives the attorney-in-fact (the person empowered to make decisions for someone else) the right to make decisions on a very limited number of issues. For example, in the example mentioned above, you might draft a power of attorney agreement that only gives the attorney-in-fact the power to buy the designated piece of real estate, and nothing else. This prevents them from acting on your behalf in a way that can get you into trouble.
On the other hand, "general" power of attorney lets someone make a wide range of decisions on your behalf, including entering contracts, buying life insurance, filing tax returns, handling your bank accounts, and many other things. Obviously, you should only give this type of authority to someone you trust completely, and only if you have a very good reason for doing so.
If you are in a position where you think it might be necessary to grant power of attorney to someone else, you should speak with a lawyer who specializes in such matters. They will be able to draft a power of attorney agreement that accomplishes your objectives, without giving the attorney-in-fact more power than necessary.