The reason behind blocking the SIM Card is so no calls can be made on it. Any made using it, you can be liable for. Its listed in your name, so any prank calls made from it, your liable & they have your address.
As you say its seperate from the phone, so can be used in another handset. Unless blocked. Also required if you intend to keep the number
Doesn't quite work like that, but you do need to tell the network certainly. The point is the SIM (subscriber identity module) is configured to work in the network and then the network is loaded up with your details. Strictly speaking, the phone number isn't even in the SIM (albeit there's something called the IMSI - which is a bit like a phone number used behind the scenes). You cancel your account, and they delete the SIM's details from the network, and send you a new SIM out. Phone number remains in the network.
.... sorry, realise I'm being a bit geeky - yes, do tell the network to "block the SIM" as well.
Keeping the number isn't an issue unless you cancel the account entirely
By "they have your address" I take it you mean the network does?
EDIT - having re-read the above, I've just remembered I'm not signing off a technical spec for the workflow - so I think your lay persons summary of "block the SIM" is probably good enough !