If you can see the pipe, you can insulate it. there are no setbacks or gaps you need to worry about. You can even go so far as wrapping the entire water heater with an insulation blanket and sealing your pipe insulation to the tank wrap.

https://www.amazon.com/Insulation-FIBERGLASS-Certified-Satisfaction-Guaranteed/dp/B0041871AY

Tank wraps are more for older, less efficient tanks, or if they are in unconditioned spaces.