The grease in a pool lighting is a type of thermal conductive lubricant. It's typically silicone based and placed between two objects to allow for heat conduction. In the case of pool housing, it creates a stronger seal on the light gasket or O-ring, keeps moisture away from the lighting assembly, and prevents corrosion. Petroleum lubricants aren't used because they eat away at plastic over time.
Only a small amount of lubricant is required in pool light housing. Using too much can make reassembly more difficult. Apply a small amount, about a dime size, drop, onto the O-ring and spread it out in a thin layer around the ring before slipping it onto the bulb assembly. Always follow label instructions for proper use and storage.
Since silicone lubricant is typically used in small amounts, it doesn't pose too high of a risk when properly used and stored. However, prolonged exposure can sometimes produce headache, nausea, and in extreme case, unconsciousness. It's also an eye and skin irritant. Always change the pool light outdoors to avoid inhaling too much lubricant.
If your pool light stops working, or water begins to leak into the housing, changing the bulb or other parts is typically necessary. During this time, replace the O-ring as well, and apply a new layer of grease. If the lubricant is dried out or discolored, it should also be replaced with new product.