Thanks again for the input, chaps.
For the record, the sim is relatively modern but thankfully doesn't have EGPWS (or even GPWS). This places a greater reliance upon situational awareness and monitoring.
Allowing students to crash is very much an option of last resort. I only use it to make a point when students rely upon a) the other pilot to do their thinking for them, b) the instructor to rescue them, c) luck, d) don't speak up as PNF/PM and therefore allow the other pilot to "kill" them or e) rely upon whichever deity they believe in to save them.
Sometimes the requirement is to make a point about monitoring and responsibility. Sometimes it's to show them that actions have consequences. Sometimes it's to wake up a lazy student and sometimes it's to knock back an arrogant, risk-taking one (and that may involve a degree of public "humiliation"). In my experience, the response from the student is very rarely negative and if it is, is usually the types who have a negative response to any type of training!
Whatever the circumstances, it's not something that done lightly but can (if done right) be useful (in my opinion).