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NO! This is a FIRE HAZARD. Manufacturers of all water heaters always install insulation around the tank then cover it with the sheet metal jacket. I have seen many times where a person has insulated a gas water heater and the flames from the burner chamber escaped from the cover and ignited the plastic on the insulation blanket.

Source: Me, a Master Plumber.

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Q: Do gas water heaters need to be insulated?
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