In this DEMO, we have employed a particular technique. We have fashioned an image that mirrors the dimensions of the stage (canvas), albeit with a transparent circular area in the center.
The white area is transparent
We have included the initial image element in the Product Builder and activated the "Stay on Top" option in the General section. This means that any image added by a customer will appear behind the overlay image, with only the visible portion within the circle being displayed.
Of course you can create your own image overlay and upload it, e.g. you can even have a transparent area that looks like a Phone-Case.
One other option would be to utilize masks as outlined in this article.