Well Jon, I hope you have the manufacturer's directions handy as they are the only ones that can truly answer the clearance questions based on their UL testing.
With that, the general rule of thumb is you need at least three inches from any combustible surface.
Along those lines you should not be insulating the top as you need the heat to escape as these fixtures can get quite hot and if they get hot enough they will shut down (hopefully). A much better solution (besides removing the recessed lights altogether) is to replace them with an IC rated fixture, and/or consider switching to LED.
One other suggestion to aid in air sealing is instead of creating your own box, use Tenmat covers which are designed specifically for these types of issues.
- While you may see some advice out there to apply tape inside a fixture or foam around the outside, please do not do so.
- You can safely caulk around the box where it comes through the drywall but that is basically it besides the cover.
For more information:
Read Sean's blog post "RIP: The Recessed Light".