Why overhaul an engine?

The reason you would overhaul (rebuild) an engine is because some of the internal workings are parts that are designed to wear out.

Rod bearings are the best example of this. If you've even owned/driven and older car that hasn't been rebuilt you might hear the sound of a rod "knocking". This is because the rods themselves are designed to "float" by means of high oil pressure and not touch the rod bearings while the engine is running; however, whenever you start the vehicle the rod does collide with the rod bearing, causing it to slowly wear out (because its a softer material than the rods themselves.

So when overhauling the engine you would replace these "wear parts" and possibly replace/repair anything internal to the engine that would be far enough out of spec to cause performance issues.