When you insert attachments into Outlook.com email messages, you can either add the attachment as an attachment or link to a file in your OneDrive account. Images can be inserted inline (embedded) so they display in the message, or attached as files.
If you account is on the new Outlook.com server, you'll use the Attach button in the toolbar above the message header to insert links to files or attachment them directly, or to embed an image into the message body, click the image button in the toolbar above the message field.
If your account is still on the old server, these options are in the Insert menu in the button bar at the top of the window.
When you insert a File as an attachment, it's added to the message between the subject and message body, with large icons displayed. If you attach an image file as an attachment, a small preview thumbnail is shown in the attachment field. Links to OneDrive documents are shown under the signature.
Inserting Images inline adds the image to the message body, at the cursor position in the message body.