The protection is built from a bond, not a guarantee fund. If a five-year zero-coupon bond from the issuer costs 84 today, the remaining 16 buys call options that deliver whatever upside the note offers. Higher interest rates make the bond cheaper and leave more for options, which is why these notes offer better terms when rates are high.
Costs of protection appear as limits on the upside: a participation rate below 100%, a cap, or exclusion of dividends. Over long periods the dividends alone can be a substantial share of an equity index's total-return.
Protection is only as good as the issuer, and it applies at maturity only. Selling early can return less than the invested amount even when the note is described as protected. See issuer-credit-risk and participation-rate-portfolio.
Related: structured-product, issuer-credit-risk, autocallable-note, total-return, call-option