The deal is worth $35 million over five years and includes $17 million in guarantees, a source said.
The Seahawks formally announced the extension Monday during a news conference.
Chancellor was a Pro Bowler in 2011 and finished last season second on the Seahawks with 101 tackles.
Coach Pete Carroll and the Seahawks organization have made it a point to start rewarding some of the team's best young players. Last year, they gave Max Unger, a Pro Bowl center, a $6 million-a-year deal.
Chancellor's contract was one of this year's priorities. Over the next couple of years, the team will be looking to extend cornerback Richard Sherman, left tackle Russell Okung, safety Earl Thomas and others.
"This whole offseason has been about Kam and we wouldn't have gotten into any other deals if we felt it was going to put his situation in jeopardy," general manager John Schneider said.
Chancellor, who turned 25 earlier this month, has grown from being a fifth-round pick from Virginia Tech in 2010 into the hard-hitting anchor in Seattle's talented secondary. In 2011, Chancellor was a Pro Bowl selection in his first season as a starter, when he had 97 tackles, four interceptions and 13 passes defensed.
"I've got so many words it's hard to throw them out there. I just feel great right now. The Seahawks organization has blessed me. It just feels good. I'm a happy person right now," Chancellor said.
"Negations are negotiations, things are going to be up and down, be a bumpy road. At the end of the day it's done. That's all that matters at the end."
Information from The Associated Press was used in this report.