The present invention provides a method for manufacturing a TMR sensor that reduces damage to a sensor stack during intermediate stages of the manufacturing process. In an embodiment of the invention, after formation of a sensor stack, a protective layer is deposited on the sensor stack that provides protection from materials that may be used in subsequent steps of the manufacturing process. The protective layer is subsequently converted to an insulating layer and the thickness of the insulating layer is extended to an appropriate thickness. In converting the protective layer to an insulating layer, the sensor stack is not directly exposed to materials that may damage it. For example, in an embodiment of the invention, Mg is used as the protective layer that is subsequently converted to MgO with the introduction of oxygen. Although direct contact of oxygen with the sensor stack may cause damage to the sensor stack, direct contact is avoided by the present invention. Subsequently, the thickness of the insulating layer, in this example can be extended to an appropriate thickness without exposing the sensor stack to damage causing oxygen and inter-diffusion.