Windows 7 has a "snipping tool" which is fairly easy to use...
First open the Windows Live Mail window that is not working as you hope.
Then go to Start Orb and in the search box start typing "snipping" ... it should pop up at the top of the list and when you start it you should see ...
Click New and then if you pick the "window snip" option you can click on your Windows Live Mail window and when you select it it should take a screenshot and display it in a viewer window.
At that point you can give the screenshot a name and save it as a jpeg file to your pictures library.
At this point maybe you would also take a screenshot of the hotmail option that does work like you want so we can compare.
Then you come here and choose the "advanced" option in reply so that you see extra icons.
You want the little paperclip icon to open an attachments window. There you click browse and find the picture you saved. Click the second browse button and choose picture #2. Then Click Upload and once uploaded you can close the little attachments window.
If you do nothing the pictures you uploaded will be included under everything you write in your post. If you want to control where the picture is displayed you can position your cursor where you want the picture and then hit the triangular carat beside the paperclip and select the picture from the list and you will see ...
[ ATTACH]####[/ ATTACH].