Do they use it to target ads directly?

Also check your cellular carrier's privacy settings, like CPNI. https://www.inc.com/jason-aten/verizon-is-tracking-iphone-us...

The privacy tradeoffs someone is willing to make will vary person-to-person. For many, Google only using precise location data for Ads and (probably) not shipping it off to random data brokers is a good tradeoff for powering and using the many products they offer - eg. YouTube, Maps, email/calendar, etc. Even for life360, it's very likely more than 50% of their userbase is fine with this given the features Tile and Life360 provide them.

Also, if Google already knows where I am at all times, then having them also handle some location tags would entail no further loss of privacy.

Because they purchase it

But they don't need to purchase it, they've already got it. I think the idea is they aren't willing to sell it as it's key to their business, and they'd rather not make a little more off selling it and risk their competitors leveraging it.

First sentence says it all.