Umaga, 33, will join his new team-mates in the autumn after playing for Wellington in New Zealand's National Provincial Competition.
Toulon were relegated from the French Top 14 last season after winning only three of their 26 matches.
But co-president Mourad Boudjellal is determined to see his side back among the elite and is funding Umaga's contract himself.
"I asked Tana Umaga to come and play in Toulon and he said yes," Boudjellal told L'Equipe.
"I love Toulon, I was born here and the city has helped me a lot with my business. I feel I owe Toulon something."
Toulon have also signed England World Cup winner Dan Luger, who returns to full-time rugby after taking 12 months off following a a two-year stint with Perpignan, and Samoan international fly-half Roger Warren from Cardiff.