I prefer using foam around the perimeter of the window. That said, if the gap between the window and original frame is too narrow, foam will not fit so using just a sealant would suffice. Remember, your okna will have full foam wrap around the window to thwart air leakage.
If you actually have weight pockets, only very old homes do, its totally acceptable to use fiberglass insulation due to the cavity being wide. You could use foam but its alot of extra foam and your installer will have to charge extra for that. Usually $20-25 per window extra. Regardless, the weight pocket should be insulated.

This post was edited by mmarse1 on Wed, May 14, 14 at 7:53

Thank you. The house is built in 60s, what is the likelihood that it has weight pockets? Assuming there is none, so simple caulking around the perimeter would suffice, if the space is tight between the new window and the original frame. Is that right? Thanks.

another question I have is whether it is worthwhile to upgrade to three-pane windows at a cost of $65 per window, which will reduce U-value from .25 to .19. I am in NY.

If the home was built in the 1960's, you do NOT have weight pockets.
$65 for triple pane/ Argon is worth it in my opinion.

I agree, triple pane for $65.00 each is a worthwhile upgrade.