This feature allows you to log in as if you were another user, so you can troubleshoot an issue from the users perspective. When enabled, you simply use your own password with the users username, and you will be logged in as that user.
You can turn on and off this feature as needed, and the log in as capability will only apply to the specific user you select. The user you select is the password that can be used for all accounts in addition to their normal password.
The log in as user is using their normal Joomla password, which is stored in encrypted form in the Joomla user table, so there is no additional security risk. Just ensure that you are using a strong password for your Joomla user account.