Bio-chemical sensors are expected to offer high sensitivity and specificity towards the detection of an analyte. It has been found that optical sensors based on long period fiber gratings (LPFGs) meet most of these requirements, particularly when coated with thin and high-refractive index overlays with proper bio-functionalization. In this paper, the influence of properties of the overlay material on the sensitivity of LPFG sensors to bio-analytes is analyzed. It has been observed that the sensitivity of a particular cladding mode of LPFG can be changed drastically with the adhesion of few tens of ‘nm’ of bio-layers to the surface of LPFG. “Volume refractive index sensitivity” and “add-layer sensitivity” of a particular cladding mode, dynamic range, and limit of detection of the sensors have been investigated in the context of overlay materials, bio-functionalization steps, and surrounding buffer medium. The selection criteria of the thin-film deposition technique are discussed with the aim of designing highly sensitive sensors for biological and chemical applications. Concept of optimum overlay thickness has been redefined and an effective case-specific design methodology is proposed.