Use encapsulation forwarding when the back-end server is not located on the same network segment or if you are using virtualization technology and need to forward packets that are otherwise unable to be forwarded.
In a typical configuration, Load Balancer receives a packet, P, and forwards it as packet P', where only the time-to-live (TTL) has been decremented. When you enable encapsulation, Load Balancer receives a packet P, and forwards it as E(P'), where the encapsulated packet E contains P'. The outer packet E has a unique IP header, which permits Load Balancer to forward packets across routers and across some types of virtualization technology that you could not otherwise forward packets across.
Additionally, this functionality allows you to forward packets to Solaris zones or AIX workload partitions that are on the same host, since Load Balancer can use the existing stack configuration instead of bypassing it entirely.