Can a person with Power of Attorney cash a life insurance policy and keep the money from someone who had full dementia?

Under these facts, the family member probably was the financial POA agent for the father. Therefore, unless he as the agent received permission from the father to cash out the life policy while the father was still competent, he committed fraud and the life policy beneficiaries may sue. I can't tell if you are saying that the family member and his daughter were joint beneficiaries; if that's the case, the daughter, who did not get her share of the life policy proceeds can sue. Because a life policy with valid named beneficiaries does not go through probate, the executor of the father's will probably would not be the one to sue the family member for this potential fraud.

These are suggestions and not legal advice.

You do realize by cashing in the policy that the person only received the cash in value not face value. As POA I cashed in Moms because Medicaid required it. I was allowed to set up a prepaid funeral with it.

If this person was on Medicaid in home or in a facility, they are only allowed a small amt of assets. Cash in value is an asset. As a POA I had to prove I had a right to cash in the policy. You just don't call an insurance company and say I want to cash in this policy.

As said, if this person was a POA and the Executor is someone different, the Executor can ask for an accting from the POA. Any beneficiaries can contest the final probate accting. If you are one of tge beneficiaries then you have a right to ask where the money went and why.

The money would have to be placed in the father's accounts, over which the POA does have control. That is legal, yes. The assets would be used for the father's care. YOU are unlikely to know where the funds have been placed. The POA is under no obligation to inform you.
The person has died. There is no case that can be brought now. The case would have to be brought by the person, by the person's executor if there is EVIDENCE of fraud, that is to say EVIDENCE that this money was not placed in any account of the seniors. There then might be a case on behalf of the Estate. If you are executor take your EVIDENCE to your Trust and Estate Attorney or probate attorney.
The amount may have been spent on the senior.It would be difficult, without accessing the POA records, to ascertain this. I don't know if a POA , whose duty is done with the death, has to keep the records of his accounts of any amount in and any amount out of the seniors accounts for a certain number of years. That's for you to ask the attorney and for the attorney, with his or her expertise, to let you know.
Good luck.

You asked:

Can a person with PoA cash in a life insurance policy...

Yes, if that authority is active due to the agent being officially incapacitated and the PoA is given that authority, which would be listed in the PoA document.

The second part of that question:

"...and keep the money from someone who had full dementia"

Are you sure the PoA didn't cash it in to pay for their care in a facility or cover other of their living expenses? What do you mean by "keep the money from"? Should a person with dementia have access to a large quantity of money? The active PoA decides if this is wise, and apparently they decided it wasn't.

Just because the policy was cashed in doesn't mean the PoA had greedy intentions... it might have to have been used in order to pay down to qualify for Medicaid.

If you believe it was theft then take your hard evidence to an attorney, who will then decide if there's a case. If there's not, you pay the attorney. If it goes to court and you lose, you pay the attorney out of your own pocket.