During my years of home inspections, I have observed hundreds of gas water heaters wrapped with insulation blankets. I don't like it.
The insulation hides possible leaks and other defects and often covers the identification tag which states the age of the unit.
After some research I have confirmed that the manufacturers of most gas water heaters don't like it either. In fact, the following is directly from the installation manual of a General Electric gas water heater.
"Insulation blankets, available to the general public, for external use on gas water heaters are not necessary. The purpose of an insulation blanket is to reduce the standby heat loss encountered with storage tank heaters. This water heater meets or exceeds the National Appliance Energy Conservation Act standards with respect to insulation and standby loss requirements making an insulation blanket unnecessary. The manufacturer's warranty does not cover any damage or defect caused by installation, attachment or use of any type of energy saving or other unapproved devices (other than those authorized by the manufacturer) into, onto or in conjunction with the water heater. The use of unauthorized energy saving devices may shorten the life of the water heater and may endanger life and property. The manufacturer disclaims any responsibility for such loss or injury resulting from the use of such unauthorized devices."
There are other manufacturers of water heaters that do permit the use of insulation blankets with a number of exceptions. For example A.O. Smith states the following.
"Do not apply insulation to the top of the water heater, as this will interfere with safe operation of the draft hood. Do not cover the outer door, thermostat or temperature & pressure relief valve. Do not allow insulation to come within 2" of the floor to prevent blockage of combustion air flow to the burner. Do not cover the instruction manual. Keep it on the side of the water heater or nearby for future reference. 
Do obtain new warning and instruction labels from A. O. Smith for placement on the blanket directly over the existing labels. Do inspect the insulation blanket frequently to make certain it does not sag, thereby obstructing combustion air flow."
A.O. Smith further mentions that " Failure to follow these instructions can restrict the air flow required for proper combustion, resulting in fire, asphyxiation, serious personal injury or death."
Most of the water heater insulation blanket installations that I have observed disregard the above recommendations made by A.O. Smith. In short, the energy benefits that are obtained in limited situations are clearly outweighed by the hazards created in the majority of the installations.
My advice is to allocate the thirty-dollars or so that the insulation blanket would cost for several energy efficient compact florescent light (CFL) bulbs.
On second thought...... the CFL bulbs present another hazard and hold that thought for now.
Glen Fisher southjerseynpi@aol.com
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