In psychiatric illness, there is a growing body of evidence indicating that sleep disturbances exert a detrimental influence on the course of these disorders and contribute to impaired function. Even when psychiatric disorders are successfully treated or stabilized, insomnia and other sleep disturbances often fail to remit. The present review focuses on sleep in two severe mental illnesses, namely bipolar disorder and schizophrenia. This article discusses the role of sleep disturbances and altered sleep architecture in relation to symptom status, functional impairment, quality of life, and the course of these disorders. Current evidence regarding pharmacological and psychological treatment approaches for insomnia in these populations is presented. This review also notes considerations for adapting Cognitive Behavioral Therapy for insomnia (CBT-I) procedures for severe mental illness and proposes directions for future research.