I'm quite new here, but if I may offer my own 2 cents:
In our organization, the term "Sensei" officially is used only when one reaches 3rd dan or higher, or if the person is a head instructor of their own dojo.
I recently had to deal with this issue as I opened my own club. (I'm sure I'm not the only one who found the idea of being called "sensei" a little unnerving!
) I ended up giving my students their choice of either calling me by my first name or as sensei. Interestingly enough, 100% of them use sensei.
I think the reason is because its a title we have come to expect (at least in the US) when learning a martial art. An example I like to use: most people, even if they know and/or socialize with their physician, still refer to him/her as "doctor" when they have a medical appointment. It helps to acknowledge the role the individual is playing. The term "sensei" seems to be similar: it reinforces the idea that the person is there to provide instruction.
Of course, the most important thing (in my opinion) is that whatever term is used, it's used respectfully.
David Shevitz, Aikido Kokikai Silver Firs