Euphemisms are considered a nice way of phrasing what is usually a negative comment or label. Think of the word "euphonic," which means "pleasing to the ear, especially through the pleasant combinations of words." Euphemisms are meant to make something sound pleasant.
Sometimes the phrase that is substituted for the specific term is meant as a courtesy to the audience. For example, it is more courteous to say that someone "has passed away" as opposed to someone "has died."
What makes a euphemism so effective is that it revolves around the concept of connotation. Writers recognize that words are associative and that members of the audience will attach feelings and images to them. Euphemisms attempt to take a term (most often one with negative connotations) and spin it into something positive by replacing the negative terms with positive ones such as "being let go" instead of "fired."
Another example is "correctional facility" versus "prison." The audience is meant to feel better about sending someone to a correctional facility because that is where that person will learn "correct behavior."
Some euphemisms go too far and obscure how an audience might perceive a subject. For example, an audience might object to "pornography" or the "porn industry," but might be willing to at least listen to an argument about the "adult entertainment industry." The term "pornography" specifically names a taboo subject. "Adult entertainment industry" seems to imply that the experiences are limited to the adult population, and the word "entertainment" has positive associations.
A consumer might feel a little more at ease buying a "preowned car" as opposed to a "used car." The term "used" implies the end of usage, as if the consumer is buying the vehicle at the end of it's life, which is not always the case. "Preowned" conveys a sense of a previous owner that no longer required the vehicle.
Think of it this way: "I'm not complaining, I'm just letting you know I'm displeased" or "I'm not laughing at you, I'm smiling about you." Both instances are meant to make someone feel a little bit better about the action or event.
Some euphemisms attempt to narrow a broad label. The terms "addiction" or "addict" have negative social connotations attached to them, and are somewhat vague. The alternative euphemism seeks to clarify what being an addict actually means, it has been largely replaced by a more specific phrase: "chemical dependency."
For the most part, it is best to use the actual terms. If the prison you are referring to is called a Department of Corrections or a Correctional Facility then you should refer to it as such. If it is called a Prison, then refer to it as a Prison.
When in doubt, consider your audience. Some audiences would prefer the euphemism, while others find it to be evasive. As with most effective word choices, the situation in which you use the euphemisms and the audience you're addressing will determine the best course of action. It's all about what will sound good to them.