The National Association of Securities Dealers says consumers should make sure they understand the ramifications before selling in-force life insurance policies.

Life settlement transactions “can be a valuable source of liquidity for people who no longer want or need their current policies,” NASD Chairman Mary Schapiro says in a statement issued by the NASD, Washington.

But transaction costs can be high, determining whether a policy is selling for a fair price can be difficult, and a transaction can cause problems for some insureds, Schapiro says.

“The best advice is to proceed with caution,” Schapiro says.

Competition in the life settlement market is intense because some have estimated the market could prove to be a $100 billion market, NASD officials report.

The NASD is recommending in an investor alert that consumers consider factors such as whether they will have trouble getting new life insurance coverage after selling existing policies.

For some consumers, any lump-sum payments may be taxable, and a life settlement payment could interfere with a consumer’s ability to receive Medicaid benefits, officials write.

In a section on transaction costs, NASD officials note that commissions paid by life settlement companies to financial brokers involved in a transaction may be as high as 30%.

“Ask your broker or other financial advisor how they are being compensated and what other parties are receiving commissions,” officials write.

At least one company has set up a life insurance policy bulletin board trading system.

But NASD officials say there is not yet a “transparent secondary market” for life insurance policies.

For now, “the best way to make sure you’re getting a fair price is to shop around–by contacting multiple life settlement companies yourself or using a licensed life settlement broker who will shop your policy around on your behalf,” NASD officials write.