Are notes “on my phone” and “on my iPad” only on the phone and iPad and not accessible to the cloud?
You can choose. You can keep them exclusively on an iDevice, but then they won't sync.
But if you go in to Settings > Apple ID > iCloud, then you can choose which things you want to sync.
If you select "Notes", then it will be stored on iCloud and synced to those iDevices.
Yes would mean passwords stored there would be safe unless someone had my actual device. Is this correct?
If you choose to store on iCloud and sync to your iDevices, then whatever is in "Notes" will be handled in this way. If someone got your device, knew your email and iCloud password and signed in, only then would they have access to everything on iCloud.
Using 2 Factor Authentication (2FA) would protect you further from such an intrusion.
And third why isn’t this safer then a password maneuver that encrypts passwords but stores them in 5e cloud?
Not entirely sure what you mean; but say you have a PW manager that encrypts your passwords on your device, then syncs them to your other devices; that would be more secure.
Does this address your questions adequately?
Ian