That's for creepage -- putting a lot of distance (and insulation) between high voltage (mains) and the heatsink (ground).
The shield tab is for, well, shielding. I recommend leaving it in. At worst, the unshielded EMI causes internal interference, skewing output voltages and frying the equipment (or interfering with other systems inside, causing malfunction). At best, EMI emissions are increased slightly, and you (or your customer?) comes back later, with a C&D notice from the FCC (or other gov't organization).
So, you can use an over-sized insulator, of whatever material, or the "sock" and tubular kinds are still around.
Tim