I remember being told the U.S. insignia on our OD green wool blankets signifies the soldier has died. Is this an old rumor or a tradition?

I just figured it meant United States, as in property of.

I believe it's tradition, if my DI's didn't see it when the bunk was made, there was hell to pay.

I had an instructor in AIT who flipped on me for making my bed insignia up. He said he had first hand experience making beds in this manner for the fallen when he was deployed. Oddly enough, this never came up in basic for me so I don't believe it's a standard thing, however, there's for sure units who implement the practice.