Mills was born in Chicago, Illinois. Her father, Ted Mills, a television executive, died in August 2003. Her stepmother, Genevieve, whose real name was Ginette Marguerite Auger, died March 2004. Alley's mother, Joan (Paterson) Mills Kerr, an author as well as an editor for American Heritage Magazine, died in November, 1996. Her stepfather was Chester Kerr, former director of Yale University Press. She has one sister, Hilary Mills Loomis, and one brother, Tony Mills. Her first acting role on television was in the short-lived comedy, The Associates, where she played an attorney, opposite a then-unknown Martin Short.

She lives in Los Angeles with her husband, film, television, stage actor and author Orson Bean. Bean is well known for being a long term celebrity panelist of To Tell the Truth and Match Game. Mills (who is twenty-three years his junior) is Bean's fourth wife, and they have been married since 1993. She also appeared on a special "Celebrity TV Moms" episode of the Anne Robinson version of The Weakest Link, in which she was the second one eliminated.

Mills joined the cast of The Bold and the Beautiful as Pamela Douglas, the estranged sister of Stephanie Douglas Forrester, on December 1, 2006. She was put under contract, but after making only a handful of appearances, her character went insane, was confined to a mental hospital, and then disappeared from the show. Mills reprised the role in December 2008 and has been added to the opening credits, meaning she is now likely to stay with the show for some time.