This is a mess for you to deal with. You have my sympathies (which, by the way, are not given lightly). People granted a POA have fiduciary responsibilities toward the grantor. Usually the POA itself spells out some of those duties but the State law can at least help.
In this case you have an added complication. If your mother is not mentally competent to cancel the POA or create a new one then the next step is twofold: a guardianship to create your legal authority to act on behalf of your mother and a temporary restraining order to stop your sister. Whether an attorney will act on your behalf and wait until the end of the proceeding so that you can legally use your mother's money depends on the attorney. You may have to at least pay for the filing fees.
Your sister is allowed to create a life insurance policy on your mother with her as the beneficiary is she has a beneficial interest in your mother's life.
Competency can be a fleeting thing. Someone with Altzheimer's can be competent enough to create a POA or a will. As long as she is competent at the time of the creation of the document whether she was in August or a week later is irrelevant. Have two independent witnesses testify to her signature and competency etc at the time of signing.
YOU have many questions here, and the answers to each depend on the full facts of the situation -- which cannot be determined just from what you wrote. You really need to really need to retain an attorney to investigate the facts with you and make recommendations. A number for questions are raised by your post. If your sister who has the POA had your mother declared incompetent, she likely also was then appointed the legal guardian of your mother. That’s probably why the POA is now null. You should be able to find out if a guardianship proceeding was opened and decided in PA or MD by talking to court clerks in the courts in those jurisdictions. In MD, you can go online to the MD Judiciary web site and click on “search court records”, enter your mother’s name, and see if a proceeding has been filed, what the result was, and who was named guardian. You say the bad sister has “cut your mother off” from, among other things, her own house? How is that? Has she forbidden your mother to live in her own house? Or does she actually want (or says she wants) your mother to come back and live there in “bad” sister’s care in PA? Did your mother already suffer from Alzheimers 17 months ago when she selected your “bad” sister for POA? How do you know about the misuse of your mother’s funds? Take whatever evidence you have of that misuse, and see an attorney about filing a suit in the appropriate jurisdiction, to terminate what appears to be your “bad” sister’s guardianship and having a new guardian named. Also, find out if your mother has a Will. It sounds like your dad would have taken care that they both had Wills. Find the original Will and put it in a safe place if you can. If you are concerned that “bad” sister has taken, hidden, or destroyed the Will, get help from your lawyer about that too.