The title pretty much says it all.
At the start of The Terminator we see him fully naked and fully equipped.
He doesn't need them, so why does he have them?
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Kyle Reese notes that these are the top-of-the-line in infiltration units. Skynet had spared absolutely no expense in making them look as human as possible, down to the smallest physical features.
REESE: But outside, it's living human tissue. Flesh, skin, hair...blood. Grown for the cyborgs.
Pay attention. The 600 series had rubber skin. We spotted them easy. But these are new. They look human. Sweat, bad breath, everything. Very hard to spot. I had to wait 'til he moved on you before I could zero him.
From a purely out-of-universe perspective, obviously the idea that the Terminator might be as smooth as a Ken-Doll would undermine how scary he is.
Sarah Connor Chronicles - (until I can get home and confirm the episode) but I believe there's an ep where robots have replaced humans in marriages and have maintained the relationship for long periods of time. It’s heavily implied sex was a part of that. It’s the episode where a terminator has replaced the husband of a city planner and it’s his mission to ensure she completes a project that lays the foundation for Skynet (unknown to her at the time).
EDIT Episode 108: Vick's Chip - http://terminator.wikia.com/wiki/Episode_108:_Vick%27s_Chip
The T-888's infiltration protocols are advanced enough to allow it to sustain married life with a key Skynet progenitor to remain close to her. Time of his insertion into the SCC timeline is as yet uncertain, but is certainly long term in nature. It is very likely that the Terminator Vick was based upon a real person. This is touched upon in reference to an automobile accident that happened prior to the episode, and similar occurrences are seen in Season 2.
Disguise, attraction and entrapment.
May I direct you to Arnold Schwarzenegger's commentary on the 2003 "Terminator 3" movie. (5:13)
"The scene with the enlargement of the breasts was fantastic. Because there's some guys that like little breasts, and there's some guys that like big breasts, so it's just- wouldn't it be nice if you could play both sides? You know it's... sometimes even simultaneously.
This allows terminators to
Disguise, if necessary.
Trick/trap or sex their way in to or out of situations.
They are made with a human skin for a purpose. To infiltrate human encampments for intelligence gathering and dissemination of useful information. If it was discovered and it easily could happen that an easy way to tell apart terminators from the real thing is to pull down their pants, people in such an apocalyptic situation would quickly resort to such a method.
The same reason it has ears, lips, skin, nipples or any other thing that humans have:
It is supposed to look like a human!
I've seen this question asked or implied about Data, Andromeda and now terminators. Why would you ever expect an android built to look like a human not to have genitals?
Consider Skynet: it collects thousands of humans, vivisects them and makes a truly perfect replica. Then it takes this replica, puts a robotic skeleton inside and has created a perfect human-look-a-like killer.
Then, for no reason what so ever, Skynet makes the skin green. Why?
Or more to the point, since Skynet didn't; why would you ask: "Why isn't the terminators skin green?"