As long as you have proper ventilation in the room where the tank is located the sleeves provided are not a problem.

The water lines in and out must not be closer than straight up.

Thanks - the lines don't come any closer, and they're flexible plastic or whatever, sleeved with braided stainless. I am just concerned if the plastic covers on the inlets get hot enough to melt/shrink back, the insulation will suffer a similar fate.

Ventilation-wise, there's no 'make-up' air vent from outside ('80's house, British Columbia) which wasn't required then (less stringent air sealing) there is of course the fresh air inlet that connects to the cold air return.

The mechanical room doors are louvred so there's plenty of air flow into the room when they're closed.

6" clearance from combustables still applies. Don't put the insulation closer than 6" from the single wall pipe, or 1" from double wall pipe. Leave the pipes uninsulated if you cannot make these clearances.

Thanks - makes sense. I'll use the fibreglass wrap up to the 6" point.