Not all decisions are so important as this one, so since you have no experience you have done well to ask. You will find a number of threads that discuss this in detail but here is the basic info you need.
Get a good host like like Bluehost or Websitepalace as you mention or Hostgator or Dreamhost and use their one step installer to set up the WordPress.
With a free WordPress installation you do not own your own domain and cannot install ads, etc. Even with their paid services there are some disadvantages as well as higher costs. What you call "premium" is not really premium at all, just what you would ordinarily have anyway with hosting and the full WordPress program.
One of the most significant of these is that unless you get your own domain you have links into their site not yours! If you do not have your own domain links you would lose everything if you ever moved or they dropped you, and even the premium package price you mentioned is limited in many ways. So at a minimum you need the premium setup to start so you have your own domain name.
The way they make money, which is OK for some people I suppose but not to anyone who wants to make money on their own, is to focus on giving people a "free" site but then disallowing advertising and putting their own ads on instead. Users look at it as getting free hosting; they look at it as getting free content and site management for the sites they in fact own even though the people operating them imagine they do.
Go with your own site domain and hosting so that you maintain control of your work. We hear from people regularly who get set up with someone else really owning their domain and later losing control. It is not worth taking such a chance and if you pay for all the things you get normally with regular hosting I think you will find the price to be significant.
My estimate is that buying your own domain and hosting for about the price of their medium premium service would be fully equal to their top business grade level which costs about $300.