This is an example of an embedded video selected by copying the URL from the YouTube webpage and pasting into the insert video window. Select the video button, then a dialog appears allowing you to upload or select a YouTube video. The video appears in the post and when played plays on the blog without taking the viewer to YouTube. That's why it's called embedded.
While it's possible to search YouTube from within the insert video button, I found it easier to look for the video I want to post on YouTube, then copy and paste the link in the search box as shown below the video.