I think commas are the best when you want to use that phrase. "Instead saying" is added when you want to add something that replaces another in a sentence, mostly concerning the thoughts of a character. That example uses a commas but it really depends on how you want to use it.
For example: He denied having participated in the event, instead saying that he had been babysitting his cousin for the entire time.
For this, the word "that" replaced the second comma, so it was unnecessary to include it. Like I said before, it really depends on how you want to use the phrase and how you phrase your sentence.
In general, if you use "that" after "instead saying," you most likely won't need a comma. If you continue with another independent sentence after "instead saying," I would say you'll most likely use a comma after it. I hope I helped and this makes sense!