Buying protection is the same as shorting the reference entity, so in case there is a default, if the protection buyer does not already hold the underlying, he can buy it from the market, issue a notice to the protection seller of physical delivery intention, then deliver it and receive par.
Of course if you already hold the underlying, then you can simply deliver the obligation against receiving par. And you are right, this is exactly like an insurance contract, and more specifically, a financial guaranteed, although there's some technical differences.
Depending on your initial intention when entering into a CDS contract, you can always choose Cash settlement if you do not hold the underlying at inception.
Practically, it may be difficult to buy the underlying after a credit event, because, for active names, there would probably be more CDS outstanding notional than the amount issued for the cash. This is to say, the price of the defaulted issue may actually rise.
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