Farrell was born in Cedar Rapids, Iowa, the daughter of Kay Carol Christine (Bendickson) and Edwin Francis Farrell, Jr. Later, her mother married David W. Grussendorf, who adopted Terry and her sister, Christine. In her junior year of high school, the nearly six feet tall Farrell submitted her image to the Elite modeling agency in New York City. Shortly after, at the age of 16, she was invited to New York City and within two days of arriving, had an exclusive contract with Mademoiselle.
After 18 months of modeling, she studied acting with Kate McGregor Stewart while still modeling on the side. Her first major roles were in the short-lived 1984 television series Paper Dolls, playing a model, and in the feature film Back to School with Rodney Dangerfield. In the spring of 1989, she began studying acting with Stella Adler and appeared in a number of guest-starring roles in series, including Quantum Leap and The Cosby Show. In 1992, she played Cat in a second pilot for a U.S. version of Red Dwarf, which was not picked up.
Soon after the Red Dwarf USA project folded, she was offered a lead role in Star Trek: Deep Space Nine. Farrell starred as Jadzia Dax, the space station's Starfleet science officer, a character from an alien species known as the Trill, who is host to a 300-year-old symbiont and can draw upon the memories and knowledge of the symbiont's seven previous hosts. The series debuted in January 1993. When she decided to leave the show at the end of the sixth season, Paramount killed Farrell's "host" character (though continuing the "symbiont" character in a new Dax host, played by Nicole DeBoer).
Farrell then co-starred on Paramount's television comedy series Becker. She played Regina "Reggie" Kostas, foil and love interest to Ted Danson's John Becker, for four years and 94 episodes, before she was replaced by Nancy Travis.
Farrell also provided the voice of Six of One in the animated short film Tripping the Rift, which eventually became a Sci-Fi Channel TV series with other actors providing the voice of Six. First released independently on the Internet, Tripping the Rift originally featured Patricia Beckmann as the voice of Six and was replaced by Farrell's voice for an episode of the Sci-Fi Channel's short film series Exposure, in which Farrell was guest host. Farrell's version of Six was heard only once on television.
Farrell retired from acting to concentrate on her family. She lived in Hershey, Pennsylvania, with her husband, former Sprint Corporation spokesman Brian Baker (a.k.a. the Sprint Guy) and their son, Max. She enjoys sewing and yoga. Farrell has appeared with her husband at the Hershey Area Playhouse in Hershey, Pennsylvania, in a production of A. R. Gurney's Love Letters. Farrell and Baker have been divorced since December 2015. In August 2017, it was reported that she was in a relationship with Adam Nimoy. In an interview in 2011, she said that she and Deep Space Nine co-star Michael Dorn have always been good friends. On Twitter in August 2017, Farrell confirmed that she is engaged to Adam Nimoy.
The asteroid 26734 Terryfarrell, discovered in 2001, was named in her honor by its discoverer William Kwong Yu Yeung.