Setting freezeless valve in masonry
The point of a frost-free faucet is that it drains completely when not in use (the shutoff point is at the inner end of the assembly). Insulation should not be a concern, and probably won't accomplish much--copper is a very good conductor of heat, and the outside end is exposed to the elements regardless of any insulation on the pipe. 

Follow the general guidelines of masonry with respect to plumbing and other penetrations.