[AnotherCat]

Perhaps I have misunderstood you, but I don't find that I have this problem on a T1.

My experience is that if you touch a word on the bottom few lines, including the last, the dictionary definition pops up as you say and covers the selected word, but for me the "Highlight", "Add Note", etc. menu pops up a little higher on the page above the dictionary. Even though the touched word is now covered by the dictionary pop up and so cannot be seen, if I select "Highlight", "Add Note", etc. the highlight, note, etc. is applied to the word that was touched.

Removing a highlight or note works in the same way.

EDIT: Forget to mention how it works for me for phrases; is just the same, but touch and hold the first word of the phrase, the dictionary pops up and covers, pause a moment and then drag, the dictionary disappears leaving me to select the rest of the phrase.