The 42-year-old has penned a deal at the Midlands club until June 2016 as manager Nigel Pearson has opted to add a player with plenty of top-flight experience to his squad with rock-bottom Leicester battling against relegation.
Schwarzer has made over 600 appearances in a career that has included spells at Middlesbrough and Fulham.
Chelsea boss Jose Mourinho confirmed at the weekend that Schwarzer was set to leave Stamford Bridge and he was full of praise for the former Australia international, who had been with the league leaders since July 2013 to provide cover for the likes of Petr Cech and Thibaut Courtois.
"On behalf of myself, my staff and my players I want to say we are going to miss the big guy. We wish him all the best in his new life at Leicester," said Mourinho to reporters following Chelsea's FA Cup win over Watford.
With first-choice Leicester goalkeeper Kasper Schmeichel sidelined with a broken metatarsal, Schwarzer will challenge Ben Hamer for a place in Pearson's starting XI.
Leicester, who beat Newcastle 1-0 in the FA Cup last time out, host Aston Villa in the league on Saturday.
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