For the most part, I think you have described the differences in the two viewpoints quite well. I want to nuance one or two items. First, from my perspective a self is a soul, a unity. Second, the concept of self/soul may be, and often is, linked to punishment and reward. Such linkage, though, is not a given. Finally, you write "We don't merge with God; we realize that we are never other than God." I might write: "We don't merge with God but choose instead to love and serve God, without whom we are incomplete."
Turning to the matter of the Protestant Reformation, literacy and literalism, we need to be careful not to overstate the state of literacy in Luther's time. General literacy, of course, was not achieved for quite some time. Readers, though, were scattered throughout the population, and the easy availability of printed material enabled them to read aloud to large groups. Luther's translation of the scriptures into German accelerated the growth of literacy.
You are correct: Protestants attempted to focus on the meaning of the text. "Literal" probably is not the best term to describe most of their efforts. They, instead, sought what many of them would have called the "plain" meaning of the text. To put it another way, they sought the simplest interpretation of any given text and thus produced interpretations ranging from the literal to the allegorical.
As literacy grew, individuals produced an often bewildering variety of interpretations. Some branches on the ever-growing Protestant tree succumbed to the "literal only" approach.
I think you are on to something important with your suggestion that the availability of the Bible was so exciting that many could not imagine needing anything else. Most such persons became part of what historians usually call "The Radical Reformation." Over time, a majority of Protestants discovered the value of paying attention as well to interpretive tradition, experience and the quiet voice of Holy Spirit.