Cole, 32, will earn nearly £200,000-a-week and is expected to sign the contract extension ahead of the Capital One Cup semi-final against Swansea City on Wednesday.
Chelsea were reluctant to extend Cole's stay at Stamford Bridge but the England international is termed to be one of the best left-back's in Europe. Cole's current deal runs out at the end of the season and there were talks he could move away from Stamford Bridge.
The 32-year-old had been heavily linked with Real Madrid, Paris Saint-Germain and even Manchester United but the defender preferred to stay with the club.
Cole's new contract will bring huge satisfaction to Chelsea supporters as they feel the club is trying to overhaul the squad with young inexperienced players.
Such is the case with veteran Frank Lampard, who is free to run down his contract which expired at the end of the season. Lampard, 34, is expected to join MLS side LA Galaxy as a replacement for David Beckham but AC Milan are interested to sign the England international.
Ryan Bertrand was offered an improved contract earlier in the season which indicated the youngster would be a possible replacement for Cole. But the 23-year-old failed to impress this season.
Cole, who has 99 caps for England, brings in vast experience to the team alongside Lampard and captain John Terry.