To add an image we can do the following once the Microsoft Word merge file opens:
  1. Go to Insert > Pictures
  2. Select image from your computer
  3. Place image in document
  4. Select Add-ins > Save and return to RE7
  5. Complete merge
If the image does not appear, it could be that the file is too large (see A .jpeg image does not appear in a mail merge document).

For more information about creating letters, please reference:
How to prepare donor acknowledgement (thank you) letters (includes video demo)
How to create letters, including letter codes, in Configuration