Google calls this option "2-step verification," although it's often referred to as "two-factor authentication." By either name, it adds an extra line of defense beyond your password: a numeric code generated on the spot for each login and then discarded.
It's an extra step, but it's one that significantly improves the security of your Google Account because it requires the powerful combination of both something you know—your username and password—and something that only you should have—your phone. A hacker would need access to both of these factors to gain access to your account. If you like, you can always choose a "Remember verification for this computer for 30 days" option, and you won't need to re-enter a code for another 30 days. You can also set up one-time application-specific passwords to sign in to your account from non-browser based applications that are designed to only ask for a password, and cannot prompt for the code.
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