The 30-year-old forward and Napoli captain will move in the middle of the MLS season after his contract expires with the Serie A side in June. Insigne helped Italy win last year's European Championship title, the Azzurri winning 3-2 in a penalty shootout over England.
"This is a historic and exciting day for our club," Toronto FC president Bill Manning said. "Lorenzo is a world-class attacking player in the prime of his career. He was a European champion with Italy and has performed on the biggest stages during his club career. Lorenzo has the talent to change games. He plays the game with joy and passion, and our fans and supporters are going to love watching him."