The NASD is warning seniors about the perils of viatical or life settlements–selling their life insurance policies for cash. For life insurance policies, there is no “transparent secondary market” making it difficult for seniors to tell if they are being offered a fair price; that plus high transaction costs–commissions of up to 30% on some settlements–can crimp what seniors actually receive in these settlements.

Seniors generally receive a lump sum, a discount from the face value of their policy, and the insurance company eventually pays the new owner of that policy the face amount when the insured senior dies. While that cash bird-in-the-hand may look attractive at first blush, there are important issues for advisors and their senior clients to consider before making this kind of transaction. The lump sum may be taxable, and may have an impact on state or federal public assistance some seniors receive, such as Medicaid. Seniors’ confidential medical and other personal information may be shared with the buyer and even third parties, according to the NASD release, and if the senior selling the policy wants to use the proceeds to get a different insurance policy, they need to make sure they can actually qualify to do so.

“Life settlements are not for everyone,” NASD Chairman and CEO Mary Schapiro says in the release. “While they can be a valuable source of liquidity for people who no longer want or need their current policies, life settlements can have high transaction costs and can have negative consequences for your financial situation. And it is very difficult to determine whether you’re getting a fair price for your policy. The best advice is to proceed with caution.”

The investor alert is posted on the NASD Web site, will be sent as an electronic notice, and will be the subject of a planned NASD radio tour.

For the NASD’s investor alert, please go here.