The 30-year-old will become the highest paid player in MLS history when he joins at the start of July; his $15m yearly salary eclipsing the $7.2m Zlatan Ibrahimovic received when he played for LA Galaxy.
Bar loan spells at Cavese, Foggia and Pescara earlier on in his career, Insigne has spent his entire career at Napoli, where he has made 412 appearances and scored 113 goals.
Insigne has won two Coppa Italia titles and one Supercoppa Italia with Napoli.
He has won 53 caps for Italy, scoring 10 goals and helped the Azzurris win the European championships last summer.
Toronto president Bill Manning said: “This is a historic and exciting day for our club.
"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 with Napoli.
"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 as a member of our team."
Toronto head coach Bob Bradley added: "We are all looking forward to having Lorenzo join us this summer.
"His ability to create chances for himself and his teammates is special. Having watched him for many years, I also know he's also a player who works for the team.
"Lorenzo is the kind of player you come to watch because there's always a chance he'll do something unforgettable."
