I think this depends on rather you are the parent or not of the child.
1. If you are the parent.
If you are the parent I suggest answering the question fully from the moment it asked. There is never an age that is too young if the child is asking the question, and sometimes it's worth volunteering some words that they aren't asking about, like Penis and vagina, and teaching them as well.
I suggest this for many reasons, partially because I feel that honesty is a great thing and encourage using it whenever possible with kids. However, I also think these taboos are quite harmful to children, especially in the modern age. Taboos lead children to be unable or unwilling to ask parents about things they need to know about as they grow older, and ultimately can lead to the kids making mistakes because they have to learn about these things through experimentation or have false information from some school yard rumor they thought was correct. To treat topics, particularly sexual ones, as taboo now increases the odds of STD and unintended pregnancy when they child is old enough to be curious about sex and has limited useful information for it and do not feel comfortable asking parents or other trustworthy adults about it.
This example is pretty trivial, lack of knowledge about what impotent means is not going to lead to a child making mistakes later in life. However, treating it as a taboo teaches the child that they can't ask you about certain subjects which they have questions about. It starts a pattern of silence and disconnect that makes a child feel unable to come to the parent when they have important questions like deciding when their ready to have sex or wanting to be on birth control because they 'know' they can't talk to their parents about sex. If, instead, the parent answers the questions clearly and without hesitation or concern, at a level the child can understand, the child learns that they can talk to their parent about anything. It's a small step towards keeping the dialog open with the child when they are young so that they can discuss more important things later.
Thus if I was her parent and she asked I would explain it means someone is not able to do something they want to (the general definition) with some examples. I then would also add that when used to refer to a man it may mean the man has trouble having children/getting his wife pregnant (if they are really young, and aren't ready to understand all the detail of sex) or they have trouble having sex (if they are 10 and old enough to be able to understand more detail and I've already hopefully given them at least a brief understanding of the idea that sex is how someone has a child). I'd allow the girl to ask questions from there and answer them, elaborating on specifics when/if the child asked, letting them determine how much more detail they want and feel capable of understanding.
2. Not the Parent
If you are not the parent then I would be very cautious, because you don't know how the parents feel about these sort of words and concepts. I've volunteered with allot of kids and ran into parents that range from new-age hippy to ultra-conservative. I've had kids tell me they didn't dress up for Halloween because it made baby Jesus cry and girls who didn't know what their period was when it happened.
Unfortunately when you are not the parent you need to act with an extra level of caution to not do something that violates the parents since of right and wrong. A child may go back to the parent and describe what you taught them, and it may get translated by the child in a way to make it sound far worse, or the parents may simply be so uptight they would be offended about your giving any answer. Thus it's best to not be as forthright unless you know the parents and are confident they would not take offense at your giving an honest answer.
So if I were the girls teacher I would explain the other meanings of impotent, lack of potency, but simply neglect to address the sexual meaning. This would likely suffice, but if they child was asking in such a way that I couldn't neglect addressing the other meaning in context I would be tempted to do what the teacher did and send her to check the dictionary; though I would try to play it up as a learning exercise rather then because it was a taboo I was avoiding answering if at all possible. I wouldn't like having to be less forthright with the child, but when your in a role of guardian for others children you have to be very cautious about this and it's safest not to risk offense.