Wrapping a heater jacket or blanket around the tank of a water heater is a simple job and can help you reduce heating loss by as much as 45 percent. There's a simple test to know if your water heater needs insulation: Give it a touch. If it’s warm, it needs insulation. But if you have an electric water heater, you should also consider insulating underneath the tank. According to the Department of Energy, installing something called a “bottom board” will add another 4 to 9 percent to your overall savings in water heating costs.