A water heater includes a tank, an insulation blanket, and an outer shell. The insulation blanket includes a preformed foam assembled from at least two pieces of foam, which together surround the tank. The outer shell includes a lower part surrounding the at least two pieces of foam. The at least two pieces of foam have notches extending along outer comers thereof to form channels between the pieces of foam and the lower part. The channels extend from above the tank to a drain outlet from the lower part to conduct any leakage out of the water heater.