The contract includes a $5.5 million mutual option for 2013, according to a baseball source familiar with the terms. Polanco has 10 days after the 2012 World Series to decide whether he wants to exercise his option. If he does, the team either has to pick up the option or pay him a $1 million buyout. If he declines, he becomes a free agent with no buyout.
There are also $450,000 in potential annual award bonuses -- $100,000 for MVP ($75,000 if he finishes second, $50,000 if he finishes third); $50,000 each if he wins a Silver Slugger or Gold Glove; $50,000 if he makes the All-Star team; $50,000 if he's named to the AP, Sporting News or Baseball America all-star teams; $100,000 if he's World Series MVP; and $50,000 if he's the LCS MVP.
The 34-year-old infielder arrived in Philadelphia on Thursday morning to take a physical and told NBC-10 TV's John Clark that he's "excited to join a championship team."
"The Phillies were always my first choice," he said Thursday. "I played here, I know most of the guys here, I know the city. And they have a pretty good team that's committed to win. I thank all of the other teams that expressed interest in me, but the Phillies were always my first choice."
Before Wednesday, the Phillies appeared to be locked in on three potential free-agent third basemen -- Polanco, Adrian Beltre and Mark DeRosa. But talks intensified with Polanco's agents Wednesday, a day after his old team, the Tigers, declined to offer him arbitration.
Polanco is a Type A free agent, so the decision not to offer him arbitration means the Phillies signed him without losing their first-round draft pick.
Polanco played for the Phillies from 2002 to 2005. And their mutual familiarity appeared to be a major force driving their pursuit.
Although Polanco has won two Gold Gloves at second base since the Phillies traded him to Detroit, he played 95 games at third in Philadelphia. So the club seems to have no reservations about moving him back to third. And Polanco told NBC-10, "I feel very comfortable playing third base."
"I always wanted to be here, I never wanted to leave," Polanco said Thursday. "One of the reasons I wanted to come back is because it's pretty obvious the team is committed to winning. And I want to win. That's it. They asked me if I was willing to play another position and I was like, 'Sure.' I can play third base. I played in college, in St. Louis and I also played some third here. I feel pretty confident about it."
The Phillies declined the option on third baseman Pedro Feliz last month to see if they could find a right-handed-hitting offensive upgrade who could help balance their left-leaning lineup. They envision Polanco hitting second behind Jimmy Rollins, a move that would drop Shane Victorino lower in the order.
"For him to come back to Philadelphia to change positions, it's just one of the things he's about," Phillies general manager Ruben Amaro Jr. said. "He's not only a tremendous professional and a championship-type player, but he's a championship-type person, and that's what we're trying to do here, bring championship-type people, both talentwise and personnelwise."
Polanco batted .337 at Citizens Bank Park while with the Phillies, with more walks (23) than strikeouts (20). And it's his plate discipline that appeals most to the defending NL champs. Polanco has never struck out 50 times in any season in his career. Feliz, on the other hand, had a 618-217 career strikeout-walk ratio, and the Phillies were looking to add more contact to a strikeout-prone lineup.
"I want to win and you look around and we have a lot of great players," Polanco said. "It seems like you could flip this lineup around and it would still be good, you know? Whatever Charlie [Manuel] wants me to do, I'd be more than happy to do it. I just know everyone here plays to win. Chase, Victorino, Rollins, Howard, everybody."
Jayson Stark covers Major League Baseball for ESPN.com. Information from The Associated Press was used in this report.