As long as the old HW tank is in good condition with no rust inside, this is a very plausable solution. I personally would not remove the insulation, as the labor involved would be a waste of time. Since you want the coldest water to be tempered a bit, install it from your well into the cold side, and have it exit on the hot side, so that you will receive the warmest water possible, due to the rising heat factor. As a reminder, consider an occasional flush to remove any sediment from the tank.
If possible, please post up a picture of the finished product!
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