It is illegal to connect to another person's network without their permission, and it's also simply wrong. Internet hotspots are giving implicit permission to anyone in range to connect and use their wireless connection, your neighbor who simply doesn't understand network security is not giving you such permission. It's the same as him leaving his door unlocked, to you think you have permission to enter and steal anything you like in the house?
I'm somewhat surprised that you'd even bother to ask the last question.

I would think it's obvious that encrypting your wireless is the right choice. Not only does it protect you legally, you also get to use all the bandwidth that you've paid for!