The danger in the piano teacher showing how a piece goes is that inevitably the student knows that he or she will not measure up. I believe in the teacher playing for the student, but not the pieces that the student is working on. Keep the student's personal affect intact by not imposing an adult sensibility on the material.
There is a big difference between the teacher presuming to be the model for a given piece and the teacher generously modeling rich musicality in relation to playing in general. I work on this by having children improvise on percussion instruments (bells, triangles, etc.) while I play complex lyrical works. This trains them to listen while moving internally and externally. I have enjoyed some wonderful ensemble improvisation with even very young children.
