The bank indicated that it would launch the life insurer in April after it ditches its tie with Standard Life. Under the Financial Services Act, the tie prevents Bank of Scotland from selling other companies' life insurance and pensions.
The new life office will be similar to Marks & Spencer's financial services wing, selling under its own brand but outsourcing the production of life insurance, savings and pensions to which ever provider offers the best deal.
Peter Burt, chief executive, said: "The problem with the tie was that it did not allow us to offer a range of products. If, for example, Standard Life didn't offer a good term assurance product we couldn't offer one from GA. This way we can."
The new company will be tied to Sainsbury's Bank, the joint venture in which Bank of Scotland holds a 45 per cent stake, potentially allowing Sainsbury's to sell Bank of Scotland pensions.
Mr Burt said the new life insurer, developed as part of a project called "Oslo" (short for Out-Sourced Life Operation), should be profitable by the year 2002 after an initial investment of around pounds 5m.
The bank is taking a similar view on the project to that taken on Sainsbury's Bank. The bank lost pounds 17m this year, was expected to lose less than pounds 10m, and should break even by 2001.
Mr Burt disclosed the plans as the bank warned of the impact of global economic conditions on its business.
Sir Alistair Grant, bank governor, said: "Bank of Scotland, in common with all the UK clearing banks,has been faced with challenges to the UK economy arising both from the strong pound and economic uncertainties resulting from the Asian and Russian problems... the business environment overall will be less benign."
The bank's exposure to Russian and Asian difficulties was described as "negligible". But Mr Burt said the impact of the crisis on North America and Europe was yet to be felt.
"We can ask whether what is going to reach us is going to be a ripple, a wave or a tidal wave. I don't think it is going to be a tidal wave but it may be more than a ripple."
The bank's profits rose 14 per cent to pounds 420.1m in the six months to the end of August. Interim dividends jumped 16 per cent to 4.0p a share. The shares slipped from 579.5p to 573p, valuing the bank at pounds 7,140.6m.