I understand there are free versions of OneNote now that have reduced
functionality. How do I ensure I don't lose features with an "update"?
You are mistaken.
I have read some complaints that the "free" version does not allow
local storage of files.
You are mistaken.
OneNote for Windows 10 and OneNote 2016 are both free.
OneNote 2016 (commonly referred to as the “desktop app”) comes with
Microsoft Office and runs on Windows 10, Windows 8, and Windows 7.
This version looks similar to the other Office 2016 apps like Word,
Excel, and PowerPoint. The OneNote 2016 desktop app is also available
as a free download from www.onenote.com
Source: What's the difference between OneNote and OneNote 2016?