1. Yes, Lemm.ee is a separate instance.
2. You subscribe to communities that are made inside different instances.
3. Their just different instances.
4. I've got different accounts on different instances in the event one instance is having issues or is down.
5. You're looking at communities hosted on that particular instance.

~~6. Local feed is communities on your instance and all is communities on your instance combined with communities you're subscribed in.~~

6. It's all the communities your instance is federated with.

Edit: Corrected point 6 as pointed out by Communist.

The other commenter is correct but to add to number 3: there is not much difference to them now, but a lot of instances usually have a particular "flavor" to them. Like one might be more geared towards people who are interested I'm programming, others are leftist instances, others are geared towards furries, or music interests.. but that's very broad and you don't HAVE to choose an instance based on that. A lot of new instances have cropped up that are just "catch all" instances for the surge of reddit users. Look at the sidebar descriptions to see if there are any specifics to the instance and see what you vibe with.

In terms of functionality they work exactly the same

On reddit, you have reddit.com -> subreddits. on lemmy you have [all lemmys, including this one] -> the lemmy i have an account on -> communities.

Similar to how you can post on any subreddit if you have a reddit account, you can post on any lemmy community if you have an account on any lemmy server.

Think of it like old-school pre-reddit internet forums, if all of those forums were linked together, and as a whole they became a reddit-like thing.

This gives you an extra moderation step. Server/instance admins can ban an entire problematic server/instance, and you can have stricter or more lax rules depending on the server.

It’s a hybrid between old-school forums and modern reddit. lots of smaller, specialized or localized communities, which together as a whole become a reddit-like world. it’s the best of both worlds.