The move, planned to take place in three to five years, could lead to the company's seven-strong executive team receiving shares worth up to pounds 14.4m in total if new business reaches a required target.
In addition, Scottish Amicable's 2,200 staff could receive a maximum of up to pounds 23m in free shares at flotation, with the company's 1.1 million eligible policyholders receiving at least pounds 200m in bonuses.
Policyholders will also receive an initial special bonus of pounds 75m on their later with-profits policies in May if demutualisation is approved by them in March.
Payouts will be based on a combination of the length of time policies have been held by members and their value.
The plan requires pounds 350m in financial backing from Swiss Re, the reinsurance firm, aimed at bolstering Scottish Amicable's with-profits fund. In addition, Securitas Capital, the venture capital firm jointly owned by Swiss Re and Credit Suisse Group, will contribute pounds 45m to finance new business growth by ScotAm.
Swiss Re and Securitas, whose presence was described as helping instill "a more sharply profit-focused culture", will have three seats on a new board.
Sandy Stewart, chairman of Scottish Amicable, said: "These proposals are designed to create substantial added value over the medium and long term for with-profit policyholders and enable Scottish Amicable to build on its strong market position.
"We are delighted to welcome Swiss Re and Securitas as our partners and I am pleased that they will be joining our new board."
Today's decision makes Scottish Amicable the second UK life assurance group to seek a flotation, following plans announced last year by Norwich Union.
Scottish Amicable is the UK's sixth-largest mutual life assurance company, selling a whole range of life, pensions, savings and investment products.
At the end of 1995, it had total funds under management of pounds 11.6bn and total premium income for the year of pounds 1bn.
The announcement brings to an end more than a year of intense speculation about its long-term future, with several firms, including Prudential and both Dutch and German insurers being named as potential predators.
Scottish Amicable said significant opportunities existed for profitable growth in its businesses. But to take full advantage "requires access to external capital in both the short and long term".
Mr Stewart argued the group intended to hold on to its independence: "Our plans do not include being gobbled up by anybody."
Ashok Gupta, finance director at Scottish Amicable, said the demutualisation and flotation process would be in two stages. In the first stage, the business, staff and operations of the group will be transferred to a new company, Scottish Amicable Life.
This will be a wholly owned subsidiary of Scottish Amicable Holdings, a newly formed company, with 79 per cent voting rights held by a voting trust representing policyholders.
Swiss Re's backing will give a pounds 350m boost to Scottish Amicable's with- profit fund, to be managed by Scottish Amicable Life.