Yes, I concur - that fits my understanding of the legal and social situation - and Israel definitely isn't alone in trying to manage ingrained prejudice. God knows my country (the UK) still hasn't gotten to grips with it, and we've caused a lot more misery, historically, than most countries have.
It's definitely good that the Palestinians in Israel live in a modern, clean, 21st century society with all the good things that such a country provides.
Just as you say, they are not Israeli citizens, and as a result they only enjoy a subset of protections and - because of the terrorist attacks Israel suffers - they are also restricted and heavily policed.
If we then couple that to the redistribution of land in the area, whereby Israel has been attacked several times and, in the courses of those skirmishes and wars, has taken land (I'm not judging the right-ness of that). The Israeli government also seems intent on settling that land (I'm not judging that, either).
Put all together, it does then pose the question of what happens to the Palestinian people there? They can stay where they are (kinda) and be second class citizens in a country that is, politically, deeply mistrustful of them. Alternatively, assuming the borders open up, they can leave their homes and go somewhere else.
That feels like a terrible situation to put humans into. Maybe some guy just runs a little sandwich shop, has a wife and two kids, lived there all his life... now suddenly his family are told "stay here and be a lower-caste of human or go away; we don't care where, just get lost".
You're quite right when you observe that this doesn't just happen in Israel. There are some awful things happening around the globe right now - I think it's the twelve year anniversary of the start of the Syrian war. Definitely we must hold those governments to account. Also, some people criticising the State of Israel are also doing it as a proxy for anti-Semitism, they just think it's bad because the Jews are doing it.
Personally, I think it is proper to hold the Israeli government to a better standard - just as I hold my own government to a better standard. In the UK, I vote; I protest; I march and I'm active with my trade unions. I want my government to do better, MUCH better. When I think of Israel, I think of a country like mine, full of people who could easily be my next-door neighbours, in-laws, co-workers and friends. It's not a religious theocracy like Iran, or a haven for monsters like ISIS like Afghanistan is. It's a modern, democratic state like my own. I think of when I was about 7, and one of my friends at Primary School (elementary school) was a sweet little Jewish girl... and her identity as Jewish was just a normal thing - no big deal. Like having brown hair or green eyes. "I'm good, you're good, let's eat".
That's why, for me, I hold the Israeli government to a higher standard than Syria or Yemen or Sudan. Those other situations are terrible and we should be upset about them, and we should also remind the Israeli government that they are supposed to be better than those other governments.
(sorry, no links this time as we're basically just into my opinions now. Incidentally, I don't know if you have friends or loved ones affected by Hamas or the actions going on in Israel/Gaza, but if you do I hope they are safe and well and remain so.)