Blackstone will pay $4.3 billion upfront and up to an additional $500 million based on future performance.
London-headquartered Aon said it expected the deal to improve its return on invested capital and add to adjusted earnings per share in 2018.
Proceeds from the deal after tax are expected to be about $3 billion, subject to customary working capital and other adjustments, Aon said.
The company said it expects to use part of the proceeds to buy back shares and raised its repurchase program by $5 billion to $7.7 billion.
Reuters first reported the news on Thursday, citing sources who said Blackstone prevailed over buyout firm Clayton Dubilier & Rice LLC in an auction for the deal.
The deal allows Aon to exit a mature, capital-intensive outsourcing business and focus on growth areas such as cybersecurity and health insurance.
It also gives Blackstone ownership of a business that processes work benefits for 15 percent of the U.S. population.
Private equity firms have been keen investors in businesses that help companies cut costs by outsourcing large parts of their administrative functions, since such operations can generate strong cash flows.
They typically seek to sell ownership of such assets at a big profit a few years after they invest.
Blackstone will have to pay Aon a termination fee of $215 million if the agreement falls through, Aon said in a filing.
Aon also reported better-than-expected fourth-quarter earnings, helped by strength in its retail business.
The company's net income attributable to shareholders fell to $502 million, or $1.87 per share, in the fourth quarter ended Dec. 31, from $584 million, or $2.09 per share, a year earlier.
On an adjusted basis, Aon earned $2.56 per share, beating the average analysts' estimate of $2.49, according to Thomson Reuters I/B/E/S.
Total revenue rose about 1.1 percent to $3.32 billion, while revenue in the outsourcing business increased 1.8 percent to $854 million.
Morgan Stanley was Aon's financial adviser while Citigroup, Credit Suisse, and SMB Capital advised Blackstone.
Sidley Austin LLP provided legal counsel to Aon and Kirkland & Ellis LLP to Blackstone.
Reporting by Nikhil Subba in Bengaluru; Editing by Shounak Dasgupta