Insomnia is the most prevalent sleep disorder with significant implications for mental and physical health. While traditionally understood through a biomedical lens, increasing evidence highlights the role of psychosomatic factors in its onset and perpetuation. This narrative review explores the relationship between psychological and somatic influences on insomnia, examining the underlying mechanisms, diagnostic challenges, and treatment strategies. We discuss neurobiological pathways, including the hypothalamic–pituitary–adrenal axis and neurotransmitter imbalances, alongside psychological factors such as anxiety, hyperarousal, and cognitive distortions. Somatic symptoms, particularly chronic pain, and other physical conditions are also regarded as integral contributors to insomnia. Diagnosis of psychosomatic insomnia requires a comprehensive approach that incorporates both psychological and physical assessments, utilizing a combination of clinical interviews, standardized questionnaires, and differential diagnostic techniques. Treatment strategies are discussed in this paper with an emphasis on cognitive-behavioral therapy for insomnia, pharmacological interventions, and integrative approaches that address the multifaceted nature of the disorder. The review also highlights the importance of lifestyle modifications and the potential role of alternative therapies in managing insomnia. A rounded understanding of psychosomatic influences is crucial for effective diagnosis and treatment of insomnia. Future research should focus on personalized therapeutic approaches and further interpreting the complex interconnections between mind and body in the pathophysiology of insomnia. This perspective has the potential to enhance clinical practice and improve outcomes for individuals suffering from this challenging disorder.