By letting people know what info is collected and what is done with that information, you can create a transparent environment in which people/consumers are more confident. You can eliminate stress and concerns about the abuse of personal info.
Various legislations and legal guidelines, for example in the US and in the UK, are being developed and may affect your website, depending on what information you collect, how you do it, and what you do with it. The European Union has developed similar guidelines that contain a bit too much legal rhetoric to be completely useful. See the resource list below for reference websites.
Your policy should be written in plain readable language. Consider the policy to be a part of your site. Design the policy and publish it like the rest of your site. Design it as if you actually want people to read it. Make it short, friendly & intuitive. It should be easily accessible throughout your site.