When you level up and it asks you what you would like to improve, what does it mean when one of the 3 options(Magicka, Health, Stamina) is highlighted green? Should I be choosing the highlighted one every time?

It means that it is being buffed (increased) in some way, be it through a potion, an enchantment or something else. Basically it's a way of telling you that the base value of the stat is not the displayed value. The same goes for curses and such that decrease your stats only then the number is red but not green.