Milton, 61, AIG's vice president of reinsurance from 1982 to 2005, was convicted last year of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission.
Authorities expect Milton to be deported to his native England after he serves his sentence.
The investigation also led to the convictions of four General Re executives last year for their roles in manipulating AIG's financial statements.
Prosecutors said New York-based AIG paid Gen Re in a secret side agreement to take out reinsurance policies with AIG in 2000 and 2001, propping up AIG's stock price and inflating reserves by $500 million.
Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.
Milton's lawyer, Frederick Hafetz, told the judge before the sentence was announced that Milton is a good person who was known for helping AIG employees with their problems, including two workers who died from AIDS in the 1980s.
Hafetz also said Milton didn't benefit personally from the fraud, which he called an aberration in Milton's life.
"He has lived a life that our society would prize in its most pious ways," Hafetz said.
Assistant U.S. Attorney Ray Patricco countered that Milton has shown no remorse for his actions and hasn't taken responsibility. He also claimed Milton has done little charitable work.
"He knew exactly what was at stake in this endeavor," Patricco said.
The judge agreed with the prosecutor.
"He surely knew this was a scam from the very start," Droney said. "This was no momentary lapse in judgment."
Milton's wife, her elderly parents and her adult children were among those in the courtroom on Tuesday.
Milton's lawyer asked that his client serve his time at Allenwood Federal Correctional Institute in central Pennsylvania. Prison officials have not decided yet where Milton will be imprisoned.
Ronald Ferguson, the former chief executive of General Re, was sentenced in December to two years in prison and fined $200,000 for his role in the fraud.
Three other former Gen Re officials await sentencing. They are former senior vice president Christopher P. Garand, former chief financial officer Elizabeth Monrad and former senior vice president Robert Graham.
General Re is part of Berkshire Hathaway, which is led by billionaire investor Warren Buffett of Omaha, Nebraska.