The company's plan to seek a stock market listing follows an agreement with the Australian government in the wake of its A$576m (pounds 290m) purchase of State Bank in 1993.
David Adam, chairman of Colonial, said the decision to float had also been conditioned by the company's long-term plans to diversify and obtain ready access to capital.
He told members at yesterday's annual meeting: "The mutual structure was originally developed to allow people with similar needs to join and satisfy those needs together.
"But with changing attitudes to savings and retirement security, the whole of the product range of participants in the industry has to change and broaden. It has not been possible, even if it had been desirable, for any company to limit itself to what its original business was as a mutual and still remain viable."
Mr Adam said policyholders would be able to cast their votes at an extraordinary general meeting planned for November. If the vote is in favour, the issuing of shares in the company would take place shortly after.
Colonial Mutual, founded in 1873, is Australia's sixth-largest insurer with some A$34bn under management. It reported earnings of A$726m in 1995.
The company yesterday refused to give any indication of its likely value at flotation. However, some Australian analysts yesterday valued the company at A$1.5-2bn.
If any shares distribution were based on equal amounts for all, each of its 750,000 eligible policyholders could receive shares worth pounds 1,500. In practice, payouts are likely to be based on their length of time as policyholders, together with the type and amount of any investment.
In the UK since 1886, Colonial Mutual runs a 500-strong direct salesforce plus 50 appointed representatives from its headquarters in Chatham, Kent. Total premium income in 1995 was pounds 222m, while its UK funds under management reached pounds 3bn. The company recently launched a telephone-based mortgage service in this country.
The insurer has 500,000 policyholders in the UK, of whom two-thirds will be eligible for benefits. The remainder will not be counted as members because they have the wrong type of policy.
A company spokesman said before demutualisation took place approval had to be sought in Colonial's jurisdictions.