Most of the new hot water heaters are pretty efficient and don’t need any additional insulation. However some of the older tanks, or less efficient newer tanks, could benefit from some added insulation. They way to tell if you need more insulation is to simply touch the side of your hot water tank. If it is warm to the touch, then some of the heat is escaping which is a sign the tank isn’t that efficient.
You can buy a hot water insulation blanket for a 45 to 55 gallon tank at Home Depot or Lowe’s. It’s nothing more than fiberglass insulation with a plastic outer coat. Most come with tape already attached to the blanket, but you might want to add a bit more. To install it, simply wrap the blanket around the exterior part of your tank and tape it in place. At the top, there will be strips of tape so you can secure the blanket to the top of your hot water heater and prevent it from sliding down to the ground. However, before you tape it to the top of your heater, get a rag and clean the surface so the tape will stick better.
There are two things you must make note of, otherwise you can damage your hot water heater or worse yet, start a fire. Most tanks have an opening near the bottom of the tank near the dial that controls the temperature setting. You must not cover this hole. This is most likely where the pilot light is and it requires a steady supply of air so as to remain lit. The other thing you must not do is extend the blanket all the way to the floor. Air for the combustion of the natural gas feeds in through the bottom of the tank which is why the tank is raised off the ground a few inches. If you obstruct this supply of air, the flame can go out and natural gas may continue to leak into your home. If at any time you smell gas or you no longer have hot water, turn off the hot water heater AND any other ignition sources (such as a furnace) immediately and open any windows. Simply turning off the hot water heater is not good enough as your furnace could still ignite the gas that has escaped into the room.
The other thing that is advisable is to insulate the first 3 feet of cold water piping coming into the hot water heater and as much of the hot water piping as you can. If you feel the cold water pipe coming into the tank you will notice that it is slightly warmer closer to the tank. The hot water pipes should be insulated to retain as much of the heat as possible. There are several different types of pipe insulation products, but I found the foam tubes to be the easiest.
Since I installed our hot water heater blanket I haven’t noticed much of a difference. But if I stick my hand between the insulation and the tank, it is warmer than had the blanket not been there. According to the instructions, the blanket is supposed to pay for itself in about 18 months, but this is hard to verify.