It is used for animation mostly. It reduces vertex count during rendering and as Omar points out it prevents clipping(Faces that poke thru other faces). It is commonly used with character that have different outfits. instead of creating multiple versions of the character with each outfit. You just mask out the body part that is hidden by the clothes. Programs like poser and makehuman make extensive use of this. Another less common way it’s used, is in isolating rigged components. This is common when you have a very complex model and need to do weight painting on areas that my be blocked by other parts. Like the webbing between fingers and armpits if there are going to be close up shots where this needs to be more accurate. The armature setting is useful for seeing only the part of the mesh that you are currently animating. That is why it doesn’t update until you switch back to object mode. this is very helpful for FX and secondary animation. Like the small details that Pixar is famous for.
