It depends mainly on the location and age of the water heater. If the water heater is in an unheated area, more heat will be lost from the tank, making additional insulation more important. Newer water heaters have more built-in insulation than older ones, so you will save less by adding additional insulation. In most cases, you can easily save enough to offset the cost of the insulation. So, unless your water heater has a label or sticker telling you not to add insulation, it is usually a good idea. Don't forget to insulate any exposed hot water pipes as well. Note: Insulation blankets are not recommended on oil-fired water heaters.