Shortfall Insurance or Gap Cover Insurance
Shortfall Insurance or gap cover insurance as it is often referred to is a great policy.
Now unfortunately and generally speaking a car will depreciate faster than a loan is paid off. For example, let's say the borrowed amount is close to the full amount for the car, and in 2 years time it is stolen. It is likely the loan amount will be more than the insurer's payout, so money will need to be found to pay the "gap or "shortfall". Gap cover insurance will pay this amount.
The other good thing about gap cover is not only is the loan paid out, but the policy holder can receive a cheque for up to $4k with many insurance companies. This, in theory, is to go towards the 'on road' costs of the insured's next car or 'out of pocket' expenses incurred in the loss of their previous car.
However there is no law telling the insured what to do with it. A lot of people put $1k deposit on their next car and $3k in their pocket for example. However, its main purpose is to protect the insured from having to make repayments on a car they no longer have.