She was praised for her work rebuilding the nation after civil war and leading a process of reconciliation.
Sirleaf is the fifth victor of the prize since it was first awarded in 2007 to Mozambique's former President Joaquim Chissano.
The foundation uses five criteria to select a victor.
Throughout her two terms in office, she worked tirelessly on behalf of the people of Liberia. "Nevertheless, during her twelve years in office, Ellen Johnson Sirleaf laid the foundations on which Liberia can now build", says Dr Salim Ahmed Salim, Chair of the Prize Committee who announced the decision on Monday.
The prize committee admitted that Liberia was the only country on the continent that showed improvement in every category and sub-category of the Ibrahim Index of African Governance.
Sirleaf left office last month, handing power over to George Weah, the former Chelsea and PSG footballer turned politician.
Mrs Sirleaf made history as the first elected African female president in 2006.
She has been praised for efforts to unite the country after civil war and enabling democracy in the country.
The prize committee admitted that while Ms Sirleaf was accused of tolerating corruption, she had shown exceptional leadership in hard circumstances.
The continent's first ever female head of state becomes only the fifth victor of the annual Ibrahim pPrize for achievement in African leadership since its launch in 2006, as it is only given out when there is deemed to be a worthy candidate. Namibian Hifikepunye Pohamba won it in 2014.
The prize is paid over ten years and the recipient afterward receives US$200,000 annually for life. The victor has to be a former African head of state or government, has to have been democratically elected, and should have left office within the last three calendar years before the award.
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