Installing a water heater blanket is an easy task that really isn’t required much any more. The insulation on today’s water heaters has improved greatly with most companies using non-CFC foam insulation. Many of the water heater manufacturers have issued cautioning Technical Service Bulletins on the subject, which you should read before installing a water heater blanket on your water heater. In the TSB they mention things that may not be covered by the water heater blanket which will cause improper operation, unsafe operation and in some cases even severe scalding, and even death by scalding or, carbon monoxide poisoning. 
Gas water heaters today have more heat loss caused by the airflow up through the flue than out through the jacket. Even though today’s water heaters in most cases do not need a water heater blanket and I explain that to customers frequently I still find an occasional customer that wants a water heater blanket installed.
Most of the Technical Service Bulletins last concerns about covering the operating instructions and safety warning labels. The also have concerns about the blanket covering access panels, operating controls, T&P Valves, and gas valves or other shut off devices. With gas water heaters if the water heater blanket covers the air inlets required to supply the burner with air and or, the draft diverter with air the unit will not operate properly causing excessive levels of carbon monoxide and in some cases improper venting allowing CO into the home. Always consult the manufacturers instruction manual and Technical Service Bulletins before installing a insulation blanket on your water heater.
After cutting the insulation blanket making the required holes for the T&P valve, thermostat & element access panels, drain valve, and any other point required for safe installation on your water heater. Wrap the insulation blanket around your water heater and secure the blanket in place with tape. On gas water heaters I would like to restate that it is very important the air inlets for the burner are not covered and I personally would avoid insulating the top of the unit to avoid any interference of air flow to the draft diverter hood. I would also recommend insulating at least the first 3″ of pipe coming in and out of the water heater to help control the losses from convection. Installing insulation on all your hot water pipes can offer additional savings and in most cases you will actually notice that you are getting hotter water supplied to your fixtures.
If you are concerned about saving energy costs enough that you are wanting to install an insulation blanket perhaps you should consider installing a Heat Pump Water Heater or, Condensing Gas Tank Water Heater to allow you to heat your water in the most efficient manner possible.
