Final answer:
The best annuity for Harold, who desires both stock market participation and principal protection, is an equity indexed annuity. This type of annuity safeguards the principal while allowing for potential growth through a linkage to a stock market index, offering a balance between risk and reward.
Step-by-step explanation:
Harold wants to participate in the stock market by purchasing a deferred annuity but desires protection against the potential loss of his principal. Given the options presented, the annuity best suited for Harold would be (A) an equity indexed annuity. Equity indexed annuities offer a unique balance of risk and return; they provide a guaranteed minimum return, which means Harold's principal is protected. However, they also give the opportunity for higher returns linked to a stock market index, but without the risk of losing the principal due to market volatility, unlike variable annuities.
Variable annuities, both regular and single-premium, allow for direct participation in the stock market through investment options that can go up or down in value, which could result in a loss of principal if the investments perform poorly. In contrast, a fixed annuity provides a guaranteed return, but such returns are typically lower and may not keep pace with inflation over time. This can lead to a loss of buying power as the payouts remain constant while the cost of living increases. This is particularly problematic for retirees relying on a fixed income, as inflation can compound over time, significantly reducing their purchasing power.