How do you use Directx Feature levels?

Yes, that is one thing you can do with the feature levels. You can also just check the feature level of the device being returned, and return an error if it is below your supported feature level. So if you don't want to support DX9 GPU's, then you require a minimum feature level of 10. You can also specify which versions you want when creating the device, so that you can restrict yourself to a lower feature set. So if you wanted you could just work at feature level 10, and ignore higher feature levels.

If you're going to support a range of feature levels, usually the only practical way to do it is to author most of your functionality for the lowest common denominator and then add in a few extra shaders/features that are only active for higher feature levels. Having different code paths for everything just isn't really scalable. Even the big AAA games usually work this way.