The Language level setting sets which features the code assistance in the editor should support. For example, if you’re using JDK 1.7 but want your code to be compatible with JDK 1.6, you can set the language level lower than your actual JDK supports (6.0 in the case of JDK 1.6) and only get refactorings/syntax suggested that are supported on 1.6 and lower. Depending on your compiler, it may also give the compiler options to remove support for newer syntax elements.
The 8.0 (which, as you’re guessing corresponds to Java 8) is available for people that want to experiment with one of the Java 8 snapshots that are available. Since Java 8 isn’t released, language level 8.0 may very well change before release.