Exhibit 13



2008
			INVESTORS
			
			HERITAGE CAPITAL
			
			CORPORATION
			
			ANNUAL REVIEW




---





2008
		INVESTORS HERITAGE CAPITAL CORPORATIONANNUAL REVIEWTABLE OF CONTENTS2
		LETTER TO OUR STOCKHOLDERS4
		MANAGEMENT'S DISCUSSION AND ANALYSIS13
		MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
		FINANCIAL REPORTING14
		REPORT OF INDEPENDENT REGISTERED PUBLIC
		ACCOUNTING FIRM15
		CONSOLIDATED FINANCIAL STATEMENTS19
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS36
		BOARD OF DIRECTORS & CORPORATE OFFICERS36
		ANNUAL MEETING




---





LETTER TO OUR
STOCKHOLDERS





To our stockholders,



In a business meeting, recently I was asked, "Where are you investing new
company money?"  I replied, "We are considering a coffee can buried in the back
yard."  Of course, that is not what we are doing but I believe it expresses the
feeling many of us have about the economy and financial markets over the past
several months.  Actually, we work very diligently with our investment advisors,
Conning Asset Management Company (Conning), to invest as carefully as possible.



In my opinion, deregulation of the financial services industry in 1999, greed
and unbridled growth of exotic investment vehicles, in which we did not invest,
have brought near disaster to the U.S. economy.   In the fall of 2008, with the
speed-of-light decline of the financial health of some of the most reliable
names on Wall Street, we along with many other investing companies and
individuals suffered losses and declines due to the failures of Lehman Brothers
and others.



Our Company's investment portfolio is constantly monitored by our personnel and
by Conning for evidence of "other-than-temporary-impairments" (OTTI).  Based on
the OTTI accounting rules, during the third and fourth quarters we did recognize
an OTTI on two Lehman Brothers holdings and two Fifth Third mutual funds.  While
we expect these investments to recover to some extent prior to maturity or sale,
we are required to write down the carrying value of these investments at this
time.



The financial crisis also caused the mergers of several large financial
institutions. During the fourth quarter of 2008, we declared that we no longer
had the intent to hold a total of six other bonds related to Bank of America and
J.P. Morgan, and we recognized the related OTTI.  As a result of mergers, these
bonds now exceeded our investment guidelines relating to the amount held in any
one investment.  We believe it was important to limit our exposure and bring
these investments back within our guidelines.  These bonds are expected to be
sold in 2009.



Before taking into account the realized losses on our investments, we actually
improved our gain from operations compared to 2007, which is encouraging. 
However, the realized losses on the investment side have caused a 2008 loss in
the amount of $1,554,506.  As a result of this loss incurred during 2008,
management and the Board of Directors believed it was in the best interest of
building long-term value for the stockholders to forego the payment of a
dividend to our stockholders this year.   I regret this because it has been our
corporate philosophy to pay a dividend and we have done so since 1973.  We hope
to be able to resume dividend payments in the near future.  That is certainly
our goal.



On the positive side for our Company, even in the weak and uncertain economy,
our outlook is bright and signs for this are evident.  Our preneed and
traditional life insurance sales were steady during the past year and have been
steady through the first two months of 2009.  Positive signs of possible
improved sales and other income generating activity are visible.  We have seen
increased recruiting of new agents, reactivation of dormant agents, increased
activity in other operations and a positive attitude from our field managers
during these trying times.  That says a great deal about our corporate
philosophy and the way we operate our business.



Our new preneed product, Legacy Gold, introduced in the fourth quarter of 2007,
was well received, has performed well this past year and we expect this to
continue.  During the fourth quarter of 2008 we introduced three new life
insurance products, a new final expense plan, Heritage Final Expense II,
Heritage Protector IV for the bank market and HLW Choice Whole Life for the
traditional life market.  These plans were developed according to the 2001 CSO
table with the experience of our older plans to guide us and with flexibility
for our customers in mind.  We think final expense sales will increase as will
traditional whole and term life sales with these three new products.



Sales in our Financial Services Division is principally the sale of credit life
and credit disability insurance and mortgage protection life insurance sold
through financial institutions, primarily banks.  Sales in this market are very
dependent upon the economy, loan demand and availability of credit.  Obviously
in light of the troubled economy over the past 15 months or so, our sales in
this segment of business have been below normal.  However, if past performance
is any indication, production of life sales in this market should improve as the
economy improves.



2



---





LETTER TO OUR
STOCKHOLDERS





A growing element of importance within our organization is the service we
provide as a Third Party Administrator (TPA).  As a TPA, Investors Heritage Life
Insurance Company performs administrative work for non-affiliated insurance
companies on a fee for service basis.  We market these services through our
Corporate Development Department.  TPA work has been part of our business for
several years but we began to place more emphasis on this in the second quarter
of 2007.  We currently perform TPA work for five non-affiliated companies and
are negotiating with several others.  Our corporate development personnel also
work to find other life companies to purchase or blocks of life insurance
business to buy from other companies.  In 2008 we presented offers to several
companies resulting in the acquisition of one block of business.  We expect our
TPA fee income to continue to grow.



One of our biggest accomplishments during 2008 is not income producing but
should enhance our corporate operation in the future.  During the year we
formalized what has always been an informal process for us, Enterprise Risk
Management (ERM).  ERM is going to be a point of emphasis for regulators
throughout the nation as well as rating agencies.   We believe the steps taken
in 2008 put us in front of the curve on this process. To formalize our ERM
process, a Steering Committee was established to identify major operational
areas within Investors Heritage Life, our largest holding.  The Steering
Committee then established subcommittees to identify, evaluate and address risk
in each area.  Considerable time and personnel were dedicated to the formalized
ERM process.  Now that the protocols are established, we expect the efforts to
become a routine part of our approach to risk management.



In 2010 we will celebrate the 50th anniversary of the founding of
Investors Heritage Life Insurance Company.  Kentucky Investors, Inc. was founded three
years later.  We will have an Anniversary Committee to develop and plan the
events and acknowledgement of this milestone.   We have begun promoting this
anniversary in several ways:  our new life product is named HLW Choice Whole
Life in honor of our founder, Harry Lee Waterfield.  We are also reinstituting
our Sales Leaders' Convention in 2010.  Our sales conventions have been
successful over the years in increasing sales as well as solidifying sales
relationships.



After several years of thought and discussion, management and the Board of
Directors are recommending changing the name of Kentucky Investors, Inc. to
Investors Heritage Capital Corporation.  The timing will coincide with the
planning and celebration of the insurance company's 50th
anniversary.  We ceased being a one-state company many years ago and the
Investors Heritage name is recognized in many states.  The name change will
recognize the holding company's main source of income and enable us to better
market the TPA and other activities that involve both the parent and life
company.



As bad as the economic situation is in America, and the world for that matter, I
believe we have every reason to be positive in our outlook for the future of
Investors Heritage Capital Corporation, Investors Heritage Life and other subsidiaries.  We
have always tried to operate with an eye on the "big picture".   This philosophy
focuses on long range growth and encompasses short-term development to build a
strong, growing and lasting company one year at a time.



The expertise, support and loyalty of our sales associates, home office staff
and Board of Directors are deeply appreciated.  The confidence and support our
stockholders have given us over the years is also greatly appreciated and I
pledge that we will continue to try to repay that confidence and support with
reliable management of Investors Heritage Capital Corporation and its subsidiaries.



Respectfully submitted,



/s/ Harry Lee Waterfield II



Harry Lee Waterfield II

Chairman, Chief Executive Officer



3



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS



RESTATEMENT
OF FINANCIAL STATEMENTS



We have restated
our previously filed consolidated financial statements
for the year ended December 31, 2008 (and comparative prior year) to account for the impact of a
clerical error in the calculation of insurance reserves on certain
types of life policies, principally certain reduced paid-up policies,
extended term policies and policy riders.  This clerical error, which
originated in 1998, has resulted in understatements of Benefit reserves and
related Amounts
recoverable from reinsurers, along with Deferred federal
income tax assets.  We have restated
retained earnings effective January 1, 2007, to reflect the recognition of the
prior period cumulative effect of the error, net of associated reinsurance recoverables and the related deferred income tax assets, reducing retained
earnings by $626,847.  Additionally, we have
recorded changes in the additional insurance reserve, associated reinsurance amounts and
deferred income tax assets in the consolidated financial statements for the periods presented herein. 
These changes resulted in an increase in net loss for 2008 of $105,134 and a
reduction in net income for 2007 of $122,614.  The cumulative changes resulted in a reduction in stockholders' equity at December 31, 2008
and 2007 of $854,595 and $749,461, respectively.



These changes
have an effect on previously disclosed data relative to reinsurance, income
taxes and segment information.  Accordingly, we have revised Notes A, D and I to
reflect the restatement.  Additionally, we have adjusted various
comparison data within management's discussion and analysis to account for these
changes.  Please refer to Note L for detailed information on the effects of
these changes on individual financial statement line
items.





EXECUTIVE
OVERVIEW

The following discussion
highlights significant factors impacting the consolidated operating results and
financial condition of Investors Heritage Capital Corporation ("Investors
Heritage Capital") (formerly Kentucky Investors, Inc.) and its
subsidiaries (collectively referred to as "we", "us", "our" or the "Company") as
of and for the year ended December 31, 2008, as compared with the year ended
December 31, 2007.  This supplementary financial information should be read in
conjunction with the Consolidated Financial Statements and related Notes, all of
which are integral parts of the following analysis of our results of operations
and financial position.



Investors Heritage Capital is the parent
company of Investors Heritage Life Insurance Company ("Investors Heritage
Life"), Investors Heritage Financial Services Group, Inc. ("Investors Heritage
Financial"), Investors Heritage Printing, Inc., and is the sole member of At
Need Funding, LLC and Heritage Funding, LLC.  Investors Heritage Capital and each
subsidiary are domiciled in the Commonwealth of Kentucky.  Approximately 99% of
Investors Heritage Capital's consolidated revenue is generated by Investors Heritage
Life.



MAJOR
MARKETS AND NEW AFFILIATIONS

We continue to focus the majority of our sales efforts in the preneed funeral
market.  We have established a strong marketing base allowing us to maintain
solid premium production in our core market while operating in the currently
unfavorable economic and interest rate environment.



Investors
Heritage Financial operates under marketing agreements with Investors Heritage
Life.  These arrangements have proven successful and enabled Investors Heritage
Financial and Investors Heritage Life to utilize their expertise in the
marketing and administration of credit insurance products.  Further, Investors
Heritage Financial enables Investors Heritage Life to offer mortgage protection
and ordinary life insurance products through financial institutions. 
Additionally, Investors Heritage Financial has marketing relationships with
other unaffiliated insurance companies to provide products not currently offered
by Investors Heritage Life.



Investors
Heritage Life provides third party administrative services to five unaffiliated
companies, including one new agreement entered during 2008.  These agreements,
for various levels of administrative services on behalf of each company,
generate fee income for Investors Heritage Life.  The level of fee income is
expected to increase as the more recently formed companies grow and enhance
their operations.



Investors
Heritage Life has a strategic agreement with the Kentucky Bankers Association ("KBA"),
forming a partnership to jointly market credit insurance and related products to
Kentucky financial institutions and to serve in an administrative capacity for
KenBanc Reinsurance Company, Ltd., the KBA's wholly-owned captive insurance
company.  This arrangement generates fee income for Investors Heritage Life and
commission income for Investors Heritage Financial.



CRITICAL
ACCOUNTING POLICIES AND ESTIMATES

The discussion
and analysis of our financial condition and results of operations is based on
our Consolidated Financial Statements, which have been prepared in accordance
with U.S. generally accepted accounting principles.  Preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.  We evaluate our
estimates continually, including those related to investments, deferred
acquisition costs, present value of future profits, policy liabilities, income
taxes, accrued pension expense, regulatory requirements, contingencies and
litigation.  We base such estimates on historical experience and other
assumptions believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.  Actual
results may differ from these estimates under different assumptions or
conditions.  We believe the following accounting policies, judgments and
estimates are the most critical to the preparation of our Consolidated Financial
Statements.



Investments in Fixed Maturities, Equity Securities and Mortgage Loans

We hold fixed maturities and equity interests in a variety of companies. 
Additionally, we originate, underwrite and manage mortgage loans.  We
continuously evaluate all of our investments based on current economic
conditions, credit loss experience and other developments.  We evaluate the
difference between the cost/amortized cost and estimated fair value of each of
our investments to determine whether any decline in value is
other-than-temporary in nature.  This determination involves a degree of
uncertainty.  If a decline in the fair value of a security is



4



---





MANAGEMENT'S DISCUSSION AND ANALYSIS





determined to be temporary, the decline is recorded as an unrealized loss in
stockholders' equity. If a decline in a security's fair value is considered to
be other-than-temporary, the security is written down to the estimated fair
value with a corresponding realized loss recognized in the consolidated
statement of income.



The assessment of whether a decline in fair value is considered temporary or
other-than-temporary includes management's judgment as to the financial position
and future prospects of the entity issuing the security. It is not possible to
accurately predict when it may be determined that a specific security will
become impaired.  Future adverse changes in market conditions, poor operating
results of underlying investments and defaults on mortgage loan payments could
result in losses or an inability to recover the current carrying value of the
investments, thereby possibly requiring an impairment charge in the future. 
Likewise, a change in our ability or intent to hold temporarily impaired
securities until maturity or recovery in value could result in a future
impairment charge.



If an
other-than-temporary impairment occurs with respect to a bond, we amortize the
reduced book value back to the security's expected recovery value over the
remaining term of the bond.  We continue to review the security for further
impairment that would prompt another write-down in the value.



Deferred Acquisition Costs

The recovery of deferred acquisition costs is dependent on the future
profitability of the underlying business for which acquisition costs were
incurred.  Each reporting period, we evaluate the recoverability of the
unamortized balance of deferred acquisition costs.  We consider estimated future
gross profits or future premiums, expected mortality or morbidity, interest
earned and credited rates, persistency and expenses in determining whether the
balance is recoverable.  If we determine a portion of the unamortized balance is
not recoverable, it is immediately charged to amortization expense.  The
assumptions we use to amortize and evaluate the recoverability of the deferred
acquisition costs involve significant judgment.  A revision to these assumptions
may impact future financial results.



Deferred acquisition costs related
to annuities and universal life insurance products are deferred to the extent
deemed recoverable and amortized in relation to the present value of actual and
expected gross profits on the policies. To the extent that realized gains and
losses on securities result in adjustments to deferred acquisition costs related
to annuities, such adjustments are reflected as a component of the amortization
of deferred acquisition costs.



Deferred acquisition costs related
to annuities are also adjusted, net of tax, for the change in amortization that
would be recorded if the unrealized gains (losses) from securities had actually
been realized. This adjustment is included in the change in net unrealized
appreciation (depreciation) on available-for-sale securities, a component of
"Accumulated Other Comprehensive Income (Loss)" in the stockholders' equity
section of the balance sheet.



Policy Liabilities

Estimating liabilities for our long-duration insurance contracts requires
management to make various assumptions, including policyholder persistency,
mortality rates, investment yields, discretionary benefit increases, new
business pricing, and operating expense levels.  We evaluate historical
experience for these factors when assessing the need for changing current
assumptions.  However, since many of these factors are interdependent and
subject to short-term volatility during the long-duration contract period,
substantial judgment is required.  Actual experience may emerge differently from
that originally estimated.  Any such difference would be recognized in the
current year's consolidated statement of income.



Income Taxes

We evaluate our deferred income tax assets, which partially offset our deferred
tax liabilities, for any necessary valuation allowances.  In doing so, we
consider our ability and potential for recovering income taxes associated with
such assets, which involve significant judgment.  Revisions to the assumptions
associated with any necessary valuation allowances would be recognized in the
financial statements in the period in which such revisions are made.



Accrued Pension Expense

We maintain a defined benefit retirement plan on behalf of our employees. 
Measurement of the future benefit obligations associated with this plan involves
significant judgment, particularly in regard to the expected long-term



5



---



MANAGEMENT'S DISCUSSION AND ANALYSIS





rate of return on plan assets, rate of compensation increases and the current
discount rate used to calculate the present value of future obligations. 
Changes in these assumptions can significantly impact the accrued pension
liability and net periodic benefit expense recorded in the financial
statements.  Additionally, the funding of defined benefit plans continues to be
challenging under current funding rules.  In anticipation of future increases in
required funding, we have voluntarily increased the projected contribution to
our pension plan for 2009 by approximately $120,000 above our 2008 contribution.



BUSINESS
SEGMENTS

Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information,"requires a
"management approach" in the presentation of business segments based on how
management internally evaluates the operating performance of business units. 
The discussion of segment operating results that follows is being provided based
on segment data prepared in accordance with SFAS No. 131.  Our business segments
are as follows:



--          Preneed and Burial Products segment includes both life
and annuity products sold by funeral directors or affiliated agents to fund
prearranged funerals or to provide for the insured's final expenses.



--          Traditional and Universal Life Productssegment
includes traditional life, group life, annuities (primarily qualified) and
universal life products.



--          Credit Insurance and Administrative Services segment
includes the marketing and administration of credit life and credit accident and
health insurance products.



--          Corporate and Other segment consists of corporate
accounts primarily including stockholders' paid-in capital, earned surplus,
property and equipment and other minor business lines which include group
annuities and group and individual accident and health products.  This segment
also includes fees generated from our third party administration arrangements. 
Additionally, realized gains and losses, including realized losses as a result
of other-than-temporary impairments, are allocated to this segment.



Please see Note I to the Consolidated Financial Statements for additional
information regarding segment data.



OPERATING
RESULTS

Consolidated
Operations

Total consolidated revenues decreased approximately $4,328,000 and net income
(loss) decreased approximately $3,095,000 in 2008 compared with 2007.  These
decreases are primarily due to realized losses incurred relative to
other-than-temporary impairments on certain bonds and mutual funds within our
investment portfolio.  These impairments are further discussed in the Corporate
and Other segment discussion.



Preneed &
Burial Products

Revenues for the
preneed and burial products business segment increased approximately $1,040,000
in 2008 compared to 2007.  This increase is due primarily to increased preneed
sales from the Legacy Gold preneed product series.  Our pre-tax income (loss)
decreased approximately $568,000 in 2008 compared to prior year.  This reduction
in pre-tax income is due to continued spread compression and expense pressure in
the current unfavorable economic environment, although the increase in sales is
helping to reduce the effect.



6



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS





The table below
provides the detail of premiums for the top ten producing states for this
segment:



Preneed Premium ProductionFirst Year and SingleYear Ended December 312008
			
			2007North Carolina
			$
			7,754,552
			$
			9,107,892Kentucky
			
			5,523,149
			
			5,893,618Tennessee
			
			2,520,406
			
			1,910,156Georgia
			
			1,382,253
			
			1,336,172Virginia
			
			1,321,524
			
			1,246,302Indiana
			
			968,970
			
			737,529Florida
			
			534,065
			
			228,904South Carolina
			
			494,028
			
			518,504Ohio
			
			327,921
			
			268,895Michigan
			
			268,391
			
			198,533All Other States
			
			782,867
			
			507,821TOTAL
			$
			21,878,126
			$
			21,954,326




In late 2007, we introduced the
Legacy Gold product series, a new generation of life insurance and annuity
products marketed in conjunction with prearranged funerals.  As a part of the
process, we performed detailed analysis of the preneed market and of the
characteristics of our particular block of business.  We believe that the result
of these efforts is a very marketable product that balances profitability with
competitive commissions and death benefit growth to provide adequate proceeds to
cover funeral expenses and personal needs.  Underwritten and guaranteed issue
options are available.  This product series replaced the Legacy Protector and
Legacy Preferred series of life insurance and annuity products during early
2008.



The Heritage Final Expense
product is sold in the final expense markets.  Introduced in 2002, it is
reinsured on an 80% quota share basis exclusively with Munich American
Reassurance Company.  This reinsurance arrangement has helped to reduce first
year statutory surplus strain associated with new sales and should provide a
stable profit stream for the future.  During the fourth quarter of 2008, this
product was replaced by the new Heritage Final Expense II product, which
incorporates the 2001 CSO table while also improving the marketability and
profitability of the product.



Traditional & Universal Life
Products

Revenues for 2008 decreased approximately $1,185,000
while pre-tax income decreased approximately $347,000.  Revenues from this
segment are primarily derived from bank sales of term insurance products, for
which demand fluctuates with economic conditions.  New sales and income have
suffered due to the tightening of consumer credit markets.



Investors Heritage Financial
markets traditional insurance products through banks and other financial
institutions.  Currently, Investors Heritage Financial services 280 financial
institutions and other retail outlets contracted through Investors Heritage
Life.  Investors Heritage Financial markets Investors Heritage Life products and
continues to expand the portfolio of products available to our regular ordinary
insurance agents by offering products of other unaffiliated companies.  For a
number of years, we have provided outlets for our agents with substandard
business that Investors Heritage Life will not accept.  Investors Heritage
Financial has provided "second to die" policies, substandard life policies,
larger term policies and health insurance products through other unaffiliated
insurance companies.  Investors Heritage Financial receives a fee for providing
those services and the outlook for increased fee income from this marketing
arrangement is positive.



We utilize a combination of
yearly renewable term reinsurance and coinsurance to cede life insurance
coverage in excess of our $25,000 per life retention limit.  Most of our
business is written in the smaller face amount markets and, in the past, claims
on larger-case ordinary business caused income fluctuations.  This lower
retention level has stabilized earnings fluctuations in this segment.  The
lowered retention was achieved by maintaining the established reinsurance
treaties and adding additional yearly renewable term treaties for amounts
between $25,000 net amount at risk and the previous retention of $100,000.



7



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS





In late 2008 we updated two of
our products within this line to incorporate the 2001 CSO table while enhancing
the marketability and profitability of these products.  The HLW Choice Whole
Life replaced the Life Paid Up at 95 and the Heritage Protector IV replaced the
Heritage Protector III.



Credit Insurance &
Administrative Services

This
segment includes the marketing and administration of credit life and credit
accident and health insurance products. We reinsure 100% of the related
underwriting risk currently produced within this segment.  Accordingly, revenue
is generated primarily from marketing and initiation fees as well as servicing
and administering the credit business for our reinsurers. Because the revenue is
fee-based, segment performance is in direct relation to new premium production
coupled with fees generated as premiums are earned. Premium production within
this segment is also significantly affected by economic conditions within our
credit markets, particularly Kentucky.  Revenues for this segment increased
approximately $39,000 in 2008 while pre-tax income increased approximately
$26,000.



Corporate & Other

Revenues from this segment in
2008 decreased approximately $4,221,000 and pre-tax income (loss) decreased
$4,022,000.  The decrease in revenues and pre-tax income is primarily due to
realized losses relative to other-than-temporary impairments within the
investment portfolio.  The other-than-temporary impairment charges taken during
2008 are as follows:



--         
During the third quarter of 2008, Investors Heritage Life recognized
other-than-temporary impairments for two Lehman Brothers Holdings bonds given
their sudden bankruptcy filing.  This impairment generated a pre-tax realized
loss of $3,558,156.  We continue to hold these two bonds with the expectation of
receiving more than current market value through the liquidation process.



--         
During the fourth quarter of 2008, Investors Heritage Life recognized
other-than-temporary impairments on six other bonds related to Bank of America
and JP Morgan.  These six bonds were impaired on the basis that we do not intend
to hold the bonds to recovery in value or to maturity.  Rather, these bonds are
expected to be liquidated in 2009 in order to limit our exposure to those
positions in light of recent mergers that have expanded our exposures beyond our
internal investment guidelines.  These six bond impairments generated a pre-tax
realized loss of $409,483.



--         
Finally, due to the severity and length of decline, Investors Heritage Life
recognized other-than-temporary impairments on two Fifth Third mutual fund
holdings during the fourth quarter of 2008, with a total pre-tax impairment
charge of $917,650.  We expect to continue to hold these mutual funds, however,
no support can be documented to evidence that they will completely recover in
value in the near term as current accounting rules require.



During 2008, Investors Heritage
Financial's revenues were approximately $329,000, down $193,000 compared to
2007, and dividends in the aggregate amount of $187,000 were paid to Investors
Heritage Capital.  Revenues from Investors Heritage Printing were approximately
$366,000 in 2008, down $111,000 compared to 2007.  Investors Heritage Printing
did not pay any dividends to Investors Heritage Capital.  Management of Investors
Heritage Printing continues to focus on improving revenues from unaffiliated
sources while providing printing services for Investors Heritage Life.  Revenues
from At Need Funding were approximately $106,000 in 2008, down $50,000 compared
to 2007.  At Need Funding paid distributions of $47,500 to Investors
Heritage Capital in
2008.  Revenues from all non-Investors Heritage Life sources constitute
approximately 1% of total consolidated revenues in 2008 and management is
working on the continued growth and profitability of each of the non-life
subsidiaries.



INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES



Investments

Together with our outside
investment advisor and portfolio manager, we manage the fixed income investment
portfolio to achieve the Company's investment goals, which include the
diversification of credit risk, the maintenance of adequate portfolio liquidity,
the management of interest rate risk and the maximization of investment
returns.



8



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS





Since inception, we have maintained a sound, conservative
investment strategy.  As of December 31, 2008, 89.2% of our total invested
assets consisted of fixed income securities, compared to 88.7% at December 31,
2007.  The primary investment objectives are to maintain the quality and
integrity of the fixed income portfolio while improving the total return on
investments.



The fixed income portfolio is
diversified among sectors.  The Standard & Poor's average quality rating of our
fixed income portfolio holdings as of December 31, 2008 is AA-.  At December 31,
2008 and 2007, the fixed income portfolio was allocated as follows:



December 312008
			
			2007Corporate:Bank and finance
			16.5%
			
			20.3%Industrial and miscellaneous
			25.0%
			
			20.8%Utilities
			6.8%
			
			6.4%Government
			8.8%
			
			13.6%Mortgage-backed securities
			23.0%
			
			20.5%Foreign
			7.9%
			
			7.7%Asset-backed securities
			4.0%
			
			4.6%States and political subdivisions
			8.0%
			
			6.1%




The fixed maturities and equity securities within
our portfolio are in a net unrealized gain position of approximately $2,993,000
at December 31, 2008.  The fair values of these investments are valued in
accordance with the provisions of SFAS No. 157, "Fair Value Measurements." 
Please see Note C to the Consolidated Financial Statements for additional
information regarding these valuations.



The fixed income portfolio includes approximately
$65,742,000 (at fair value) of mortgage-backed securities ("MBS").  MBS have
historically added value to the portfolio and our outside investment advisor has
provided the expertise to purchase MBS with confidence that the credit ratings
have been properly analyzed and that the investment properly suits our asset and
liability needs.



There have been concerns expressed by rating
agencies, various regulators and other constituencies regarding investments in
MBS by insurers and other financial institutions.  Although these highly rated
securities provide excellent credit quality, their liquidity risk must be
monitored.  Except for seven commercial-backed mortgages of approximately
$5,966,000, all of the collateral of the MBS owned are guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").



The FNMA and FHLMC securities are structured either
as publicly traded collateralized mortgage obligations ("CMO") or pass-throughs. 
Unlike most corporate or real estate debt, the primary concern with MBS is the
uncertainty of timing of cash flows due to prepayment assumptions rather than
the possibility of loss of principal.



CMO holdings represent approximately 22% of the
total MBS portfolio.  In accordance with relevant accounting guidance, when
these securities are purchased at a discount or premium, the income yield will
vary with changes in prepayment speeds due to the change in accretion of
discount or amortization of premium, as well as the timing of the basic
principal and interest cash flows.  The overall impact of the CMO's variability
in yields on the portfolio has not been significant in relation to the yield and
cash flows of the total invested assets.  More importantly, the investment
portfolio has no exposure to more volatile, high-risk CMO's, such as those
structured to share in residual cash flows.  Except for two sequential pay CMO's
of approximately $77,000, the CMO's held are either planned amortization class
bonds or support class bonds, both of which are structured to provide more
certain cash flows to the investor and therefore have reduced prepayment risk. 
Based on our analysis of the investment portfolio, there are no impairment
issues with respect to our CMO's.



Pass-throughs comprise the remainder of MBS owned,
representing approximately 78% of the total MBS portfolio.  Pass-throughs are
GNMA, FNMA or FHLMC guaranteed MBS that, simply stated, pass through interest
and principal payments to the investors in accordance with their respective
ownership percentage.



We continuously monitor the investment risk within
our portfolio, including the risk associated with subprime lending with our CMO
investments.  As of December 31, 2008, we have only one CMO, with a fair value
of approximately $48,000, which has any level of direct subprime exposure. 
Based on our analysis, we believe this investment is of high quality and expect
no losses as a result of the current subprime concerns.  Additionally, we have
no Alt-A bond exposure within our current holdings.



9



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS







We also engage in commercial and residential
mortgage lending, with approximately 99.9% of these investments in commercial
properties.  All mortgage loans are either originated in-house or through two
mortgage brokers, and all loans are secured by first mortgages on the real
estate.  Loan to value ratios of 80% or less and debt service coverage from
existing cash flows of 115% or higher are generally required.  We minimize
credit risk in our mortgage loan portfolio through various methods, including
stringently underwriting the loan request, maintaining small average loan
balances, reviewing larger mortgage loans on an annual basis and diversifying
the portfolio by property type.  The average loan balance is $416,897 and the
average loan to value is 40%.  The largest loan currently held is $913,843.  We
have approximately $22,512,000 invested in mortgage loans, which represents 7.0%
of total invested assets.  The portfolio is diversified across various property
types as follows:



December 312008
			
			2007Office
			27.0%
			
			23.4%Retail
			57.8%
			
			60.7%Industrial
			4.4%
			
			5.3%Medical
			3.6%
			
			3.4%Apartments
			5.5%
			
			5.5%Other
			1.7%
			
			1.7%




We are familiar with our mortgage loan markets and
given our low loan-to-value ratios, we do not believe that the current economic
crisis will have a material negative impact on our mortgage loan portfolio.  We
have been successful in adding value to the total investment portfolio through
mortgage loan originations due to the fact that yields realized from the
mortgage loan portfolio are from approximately 100 to 300 basis points higher
than yields realized from fixed income investments.  Value has also been added
because the mortgage loan portfolio has consistently performed well.  As of
December 31, 2008 and 2007, we had no non-performing mortgage loans, which would
include loans past due 90 days or more, loans in process of foreclosure,
restructured loans and real estate acquired through foreclosure.



We have participated in a securities lending program
with third parties, mostly large brokerage firms, primarily for investment yield
enhancement purposes.  Securities loaned are treated as financing arrangements
and the unrestricted collateral received is recorded as an asset, with an
offsetting liability recorded for our obligation to return the collateral.  We
obtain collateral in an amount equal to 102% of the fair value of domestic
securities loaned, monitor the market value of securities loaned on a daily
basis and obtain additional collateral as necessary.  The collateral associated
with loaned securities is generally invested in overnight repurchase
agreements.  During the fourth quarter of 2008, we suspended participation in
this program given the uncertainty in the current market.  Accordingly, there
were no securities on loan under this agreement at December 31, 2008.  At
December 31, 2007, there were securities on loan under this agreement with a
market value of $2,124,160, with associated collateral held of $2,186,372.  We
do not currently expect to restart this program until the current market issues
subside.



Liquidity and Capital Resources

The quality of our investment portfolio and the
current level of stockholders' equity continue to provide a sound financial base
as we strive to expand our marketing system and to offer competitive, quality
products.  Our investment portfolio continues to provide financial stability. 
It is management's opinion that we have adequate cash flows both on a long-term
and short-term basis as evidenced by the net cash flows provided by operating
activities in the consolidated statements of cash flows presented in this Annual
Review.  Such cash flows were primarily derived from insurance premiums and
investment income.



The stability of our liquidity is found in our
conservative approach to product development and in the strength and stability
of our fixed income portfolio and mortgage loans.  At December 31, 2008, our
fixed income investments



10



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS





were 99.9% investment grade as rated by
Standard & Poor's. Other than the previously discussed Lehman Brothers bonds,
none of our investments are in default.  Liquidity is also managed by laddering
maturities of our fixed income portfolio.  The average duration of our fixed
income investments is 3.7 years with approximately $11,394,000 due within twelve
months and approximately $101,194,000 due within the following four years. 
Historically, management has anticipated that all such investments will be held
until maturity.  However, one of the responsibilities of our independent
portfolio manager is to constantly monitor the credit rating of our fixed income
investments to determine if rating changes of any investment requires action by
management.  As explained in detail in Note A to the Consolidated Financial
Statements, all fixed income securities and all marketable equity securities are
classified as available-for-sale and are carried at fair value.



Effective June 30, 2008, we renewed our $2,000,000
At Need Funding line of credit with interest paid monthly at the prime rate,
renewable annually.  This line of credit is used for the purpose of funding
at-need funerals secured by the assignment of verified, incontestable life
insurance policies.  At December 31, 2008, the outstanding principal balance on
this line of credit was $589,903.



Effective June 30, 2008, we renewed our $150,000
Investors Heritage Capital line of credit with interest paid monthly at the prime rate,
renewable annually.  At December 31, 2008, no amount was outstanding on this
line of credit.



On June 1, 2005, we renewed our existing bank note
in the amount of $1,434,257 with interest paid monthly at a rate of 1% under the
prime rate.  In conjunction with this note, we purchased an interest rate cap to
hedge exposure to interest rate risk.  The interest rate cap limits the interest
rate that can be charged over the remaining term to maturity of the note to no
greater than 6.5%.  At December 31, 2008, $484,757 remained outstanding on this
note.



On February 3, 2005, Investors Heritage Capital borrowed
$3,650,000 to finance the purchase of certain home office property previously
owned by Investors Heritage Life at a purchase price of $3,650,000.  The note is
an amortizing loan with a fixed interest rate of 5.05% and with a maturity date
of March 1, 2015.  The proceeds received by Investors Heritage Life were used to
repay their surplus notes to Investors Heritage Capital.  Additionally,
Investors Heritage Capital used the proceeds to repay the $3,000,000 bank note outstanding at
December 31, 2004.  This transaction was approved by the Kentucky Department of
Insurance.  At December 31, 2008, $2,491,246 remained outstanding on this note.



On November 23, 2004, we issued a promissory note in
the amount of $643,200 with an interest rate of 4%, due December 31, 2008.  The
note was issued in exchange for common stock from one of our board members. 
This note was fully paid during 2008.



On February 4, 2008, we issued a promissory note in
the amount of $135,600 with an interest rate of 4%, due February 4, 2012.  This
note was issued in exchange for a block of common stock from one of our
stockholders under our right of first refusal.



We are a member of the Federal Home Loan Bank of
Cincinnati, Ohio by way of our investment in shares of their common stock.  As a
member, we have access to both short-term and long-term borrowings at below
market rates.  Borrowings under this program are collateralized by securities
within our investment portfolio.  To this point, we have not needed to access
this borrowing capacity.



We assess our compliance with prescribed debt
covenant requirements as outlined in the terms of each debt agreement at least
annually, if not otherwise required in the debt agreement.  Management has
assessed our position as of December 31, 2008, and we are in compliance with all
debt covenant requirements.



Management is not aware of any other commitments or
unusual events that could materially affect our capital resources.  We have the
option to prepay certain notes payable at our discretion prior to their maturity
dates.



Other than the items disclosed in Note G to the
Consolidated Financial Statements and the increased federal and state regulatory
reporting requirements which generally increase administrative expenses,
management is not aware of any current recommendations by any regulatory
authority which, if implemented, would have any material effect on our
liquidity, capital resources or operations.



11



---





MANAGEMENT'S
DISCUSSION AND ANALYSIS





We will continue to explore various opportunities,
including mergers and acquisitions and purchasing blocks of business from other
companies, which may dictate a need for either long-term or short-term debt. 
There are no restrictions as to use of funds except the restriction on Investors
Heritage Life as to the payment of cash dividends to shareholders that is
discussed in more detail in Note G to the Consolidated Financial Statements.



REGULATORY MATTERS

The statutory capital and surplus of Investors
Heritage Life decreased approximately $2,495,000 in 2008.  The decrease in
statutory capital and surplus in 2008 is primarily related to the realized
losses for other-than-temporary impairments as previously discussed.  Investors
Heritage Life produced a statutory operating gain of approximately $1,170,000
and $1,028,000 in 2008 and 2007, respectively, before the effect of the realized
gains (losses).  For additional discussion on statutory accounting practices
refer to Note H to the Consolidated Financial Statements.



OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of
December 31, 2008.



FORWARD LOOKING INFORMATION

We caution readers regarding certain forward-looking
statements contained in this report and in any other statements made by, or on
behalf of, the Company, whether or not in future filings with the Securities and
Exchange Commission.  Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results or other developments.  Statements using verbs such as
"expect", "anticipate", "believe" or words of similar import generally involve
forward-looking statements.  Without limiting the foregoing, forward-looking
statements include statements which represent our beliefs concerning future
levels of sales and redemptions of our products, investment spreads and yields
or the earnings and profitability of our activities.



Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which are subject to change.  These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.  Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable factors and
developments.  Some of these may be national in scope, such as general economic
conditions, changes in tax laws and changes in interest rates.  Some may be
related to the insurance industry generally, such as pricing competition,
regulatory developments, industry consolidation and the effects of competition
in the insurance business from other insurance companies and other financial
institutions operating in our market area and elsewhere.  Others may relate to
the Company specifically, such as credit, volatility and other risks associated
with our investment portfolio.  We caution that such factors are not exclusive.
 We disclaim any obligation to update forward-looking information.



12



---





MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING (AS RESTATED)







Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is designed to provide reasonable assurances
regarding the reliability of financial reporting and the preparation of the
Consolidated Financial Statements of the Company in accordance with U.S.
generally accepted accounting principles. The Company's accounting policies and
internal controls over financial reporting, established and maintained by
management, are under the general oversight of the Company's Audit Committee.



The
Company's internal control over financial reporting includes those policies and
procedures that:



--          pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;



--          provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance with
authorizations of the Company's management and directors; and



--          provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of assets that could have a material effect on the financial statements.



A material weakness is a control deficiency, or
combination of control deficiencies, that result in more than a remote
likelihood that a material misstatement of annual or interim financial
statements will not be prevented or detected.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may
deteriorate.



Management has assessed the Company's internal control over financial reporting
as of December 31, 2008. The standard measures adopted by management in making
its evaluation are the measures in the Internal-Control Integrated Framework
published by the Committee of Sponsoring Organizations of the Treadway
Commission.



Based
upon its assessment, management had concluded in its original Annual Report on
Form 10-K for the year ended December 31, 2008, that the Company's internal
control over financial reporting was effective at December 31, 2008. 
However, as a result of the financial statement restatement
described in Note L to the 2008 consolidated financial statements and the
amended filing of its annual report on Form 10-K/A
as of the year ended December 31, 2008, management has re-evaluated the
effectiveness of internal control over financial reporting as of the end of the period
covered by this report.  In connection with this re-evaluation management
considered the control failure that resulted in a clerical coding error in the
reserve system that resulted in an incorrect calculation of insurance reserves for
a limited block of our life policies,
principally certain reduced paid-up policies, extended term policies and policy
riders.  Management has concluded that this error was the result of a
material weakness in our internal control over financial reporting.  The material weakness in the design of the Company's
internal controls over financial reporting was the lack of a formal review process to
ensure that we correctly coded the system field for all plan types. 
Management has concluded based on the re-evaluation that our internal controls
over financial reporting were not effective as of December 31, 2008 because of
the material weakness.  Subsequent to December 31, 2008, the Company
implemented a new procedure that includes the formal review of the GAAP reserve
system report for evidence of proper reserve coding on all plan types.



This
annual report does not include an attestation report of the Company's
independent registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.



13



---









Report of Independent Registered Public
Accounting Firm





The Board of Directors and Stockholders

Investors Heritage Capital Corporation



We have audited the accompanying consolidated
balance sheets of Investors Heritage Capital Corporation (the Company, formerly
Kentucky Investors, Inc.) as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.



We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.



In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Investors Heritage Capital Corporation at December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.



As discussed in Note L to the consolidated financial
statements, the Company has identified an error in the calculation of certain
benefit reserves for a block of insurance policies impacting amounts previously
reported for current and prior periods.  The Company has retroactively restated
its 2008 and 2007 consolidated financial statements to correct this error as of
January 1, 2007.









/s/ Ernst & Young LLP



Cincinnati, Ohio

March 12, 2009, except for the impact of the matters
described in Note L,

as to which the date is December
31, 2009



14



---





INVESTORS HERITAGE CAPITAL CORPORATIONCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2008 AND 2007  As Restated - Note LASSETS
			
			2008
			
			2007Investments:Securities
			available-for-sale, at fair value:Fixed maturities
			(amortized cost: 2008 - $282,335,626; 2007- $284,010,281)
			$
			285,430,376
			$
			289,856,851Equity securities
			(cost: 2008 - $4,040,062; 2007 - $3,850,263)
			
			3,938,177
			
			4,335,063Mortgage loans on real
			estate
			
			22,512,438
			
			24,812,445Policy loans
			
			6,971,949
			
			6,968,157Other long-term
			investments
			
			1,021,741
			
			878,036Short-term investments
			
			25,000
			
			25,000Total investments
			$
			319,899,681
			$
			326,875,552Cash and cash equivalents
			
			2,819,257
			
			1,238,194Accrued investment income
			
			4,338,974
			
			4,668,922Due premiums
			
			3,618,390
			
			3,726,202Deferred acquisition
			costs
			
			19,882,671
			
			20,379,631Present value of future
			profits
			
			30,260
			
			116,385Leased property under
			capital leases
			
			283,695
			
			372,928Property and equipment
			
			1,702,331
			
			1,678,094Collateral on securities
			loaned
			
			-
			
			2,186,372Cash value of
			company-owned life insurance
			
			7,764,223
			
			6,845,039Other assets
			
			338,182
			
			285,532Amounts recoverable from
			reinsurers
			
			49,899,675
			
			51,678,214$
			410,577,339
			$
			420,051,065LIABILITIES AND
			STOCKHOLDERS' EQUITYLIABILITIESPolicy liabilities:Benefit reserves
			$
			343,736,288
			$
			342,706,998Unearned premium
			reserves
			
			12,154,938
			
			12,990,293Policy claims
			
			1,504,744
			
			1,476,669Liability for
			deposit-type contracts
			
			2,733,214
			
			2,663,641Reserves for
			dividends and endowments and other
			
			524,797
			
			547,262Total policy
			liabilities
			$
			360,653,981
			$
			360,384,863Deferred federal income
			tax liability
			
			852,106
			
			4,825,215Obligations under
			capital leases
			
			284,307
			
			371,736Notes payable
			
			3,701,506
			
			4,261,948Obligations to return
			collateral under securities loan agreement
			
			-
			
			2,186,372Accrued pension
			liability
			
			5,641,941
			
			2,159,914Other liabilities
			
			1,990,538
			
			2,053,378Total liabilities
			$
			373,124,379
			$
			376,243,426STOCKHOLDERS' EQUITYCommon stock (shares
			issued:  2008-1,120,686; 2007-1,117,851)
			$
			1,120,686
			$
			1,117,851Paid-in surplus
			
			8,705,492
			
			8,650,907Accumulated other
			comprehensive income (loss)
			
			(2,542,413)
			
			1,902,238Retained earnings
			
			30,169,195
			
			32,136,643Total stockholders'
			equity
			$
			37,452,960
			$
			43,807,639$
			410,577,339
			$
			420,051,065  See Notes to Consolidated Financial Statements.




15



---





INVESTORS HERITAGE CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 2008 AND
			2007  As Restated - Note L2008
			
			2007REVENUEPremiums and other
			considerations
			$
			44,114,715
			$
			44,918,530Premiums ceded
			
			(12,323,567)
			
			(13,303,976)Net premiums earned
			
			31,791,148
			
			31,614,554Investment income, net of
			expenses
			
			17,747,806
			
			18,051,636Realized gains (losses)
			on investments, net
			
			(4,132,029)
			
			136,160Other income
			
			1,176,619
			
			1,108,904Total revenue
			$
			46,583,544
			$
			50,911,254BENEFITS AND EXPENSESDeath and other benefits
			$
			30,649,424
			$
			31,674,160Guaranteed annual
			endowments
			
			534,238
			
			559,174Dividends to
			policyholders
			
			524,362
			
			538,936Increase in benefit
			reserves and unearned premiums
			
			5,143,606
			
			3,578,276Acquisition costs
			deferred
			
			(4,853,258)
			
			(4,776,602)Amortization of deferred
			acquisition costs
			
			5,683,710
			
			5,667,548Commissions
			
			2,137,825
			
			2,064,650Other insurance expenses
			
			9,679,286
			
			9,610,382Total benefits and
			expenses
			$
			49,499,193
			$
			48,916,524INCOME (LOSS) BEFORE
			FEDERAL INCOME TAXES
			$
			(2,915,649)
			$
			1,994,730PROVISION (BENEFIT) FOR
			FEDERAL INCOME TAXESCurrent
			$
			291,846
			$
			275,128Deferred
			
			(1,652,989)
			
			179,256$
			(1,361,143)
			$
			454,384NET INCOME (LOSS)
			$
			(1,554,506)
			$
			1,540,346BASIC AND DILUTED NET
			EARNINGS (LOSS) PER SHARE
			$
			(1.39)
			$
			1.38  See Notes to Consolidated Financial Statements.




16



---





INVESTORS HERITAGE CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS'
			EQUITYFOR THE YEARS ENDED DECEMBER 31, 2008 AND
			2007  As Restated - Note LAccumulatedOther
			
			
			
			TotalCommon
			
			Paid-in
			
			Comprehensive
			
			Retained
			
			Stockholders'Stock
			
			Surplus
			
			Income (Loss)
			
			Earnings
			
			EquityBALANCE, JANUARY 1, 2007As originally
			presented
			$
			1,113,104
			$
			8,603,902
			$
			(114,520)
			$
			31,567,907
			$
			41,170,393Correction of reserve error (Note L)
			
			-
			
			-
			
			-
			
			(626,847)
			
			(626,847)As restated
			
			1,113,104
			
			8,603,902
			
			(114,520)
			
			30,941,060
			
			40,543,546Comprehensive income
			(loss):Net income
			
			-
			
			-
			
			-
			
			1,540,346
			
			1,540,346Change in net unrealized
			appreciationon available-for-sale
			securities
			
			-
			
			-
			
			1,709,790
			
			-
			
			1,709,790Change in unrealized
			pension benefits
			
			-
			
			-
			
			317,125
			
			-
			
			317,125Change in fair value of
			hedging instrument
			
			-
			
			-
			
			(10,157)
			
			-
			
			(10,157)Total comprehensive
			income
			
			
			
			
			
			
			
			
			
			3,557,104Cash dividends
			
			-
			
			-
			
			-
			
			(423,062)
			
			(423,062)Issuances of common stock,
			net
			
			4,747
			
			47,005
			
			-
			
			78,299
			
			130,051BALANCE, DECEMBER 31,
			2007
			$
			1,117,851
			$
			8,650,907
			$
			1,902,238
			$
			32,136,643
			$
			43,807,639Comprehensive income
			(loss):Net loss
			
			-
			
			-
			
			-
			
			(1,554,506)
			
			(1,554,506)Change in net unrealized
			appreciationon available-for-sale
			securities
			
			-
			
			-
			
			(1,964,271)
			
			-
			
			(1,964,271)Change in unrealized
			pension benefits
			
			-
			
			-
			
			(2,483,493)
			
			-
			
			(2,483,493)Change in fair value of
			hedging instrument
			
			-
			
			-
			
			3,113
			
			-
			
			3,113Total comprehensive
			loss
			
			
			
			
			
			
			
			
			
			(5,999,157)Cash dividends
			
			-
			
			-
			
			-
			
			(422,959)
			
			(422,959)Issuances of common stock,
			net
			
			2,835
			
			54,585
			
			-
			
			10,017
			
			67,437BALANCE, DECEMBER 31,
			2008
			$
			1,120,686
			$
			8,705,492
			$
			(2,542,413)
			$
			30,169,195
			$
			37,452,960  See Notes to Consolidated Financial Statements.




17



---





INVESTORS HERITAGE CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2008 AND
			2007  As Restated - Note L2008
			
			2007OPERATING ACTIVITIESNet income (loss)
			$
			(1,554,506)
			$
			1,540,346Adjustments to reconcile
			net income (loss)to net cash provided by
			operating activities:Realized losses (gains) on investments, net
			
			4,132,029
			
			(136,160)Provision (benefit) for deferred federal income
			taxes
			
			(1,652,989)
			
			179,256Amortization of deferred acquisition costs
			
			5,683,710
			
			5,667,548Acquisition costs deferred
			
			(4,853,258)
			
			(4,776,602)Net adjustment for premium and discount on
			investments
			
			319,408
			
			390,810Depreciation and other amortization
			
			464,113
			
			508,847Changes in operating assets and liabilities:Accrued investment income
			
			329,948
			
			(104,836)Due premiums
			
			107,812
			
			128,031Cash value of company-owned life insurance
			
			(919,184)
			
			(727,225)Amounts recoverable from reinsurers
			
			1,778,539
			
			1,967,577Benefit reserves
			
			1,834,366
			
			434,597Policy claims
			
			28,075
			
			(91,253)Liability for deposit-type contracts
			
			69,573
			
			11,638Reserves for dividends and endowments and other
			
			(22,465)
			
			(54,553)Other assets and other liabilities
			
			(480,648)
			
			(13,952)NET CASH PROVIDED BY
			OPERATING ACTIVITIES
			$
			5,264,523
			$
			4,924,069INVESTING ACTIVITIESSecurities available-for-sale:Purchases
			$
			(38,679,369)
			$
			(17,865,881)Sales and maturities
			
			35,712,786
			
			14,509,329Other investments:Cost of acquisitions
			
			(1,522,612)
			
			(3,339,983)Sales and maturities
			
			3,675,122
			
			4,058,563Net additions to property and equipment
			
			(312,992)
			
			(451,790)NET CASH USED IN
			INVESTING ACTIVITIES
			$
			(1,127,065)
			$
			(3,089,762)FINANCING ACTIVITIESReceipts from universal life policies credited topolicyholder account balances
			$
			7,670,504
			$
			9,543,732Return of policyholder account balances on universal life policies
			
			(9,310,935)
			
			(10,159,522)Payments on notes payable
			
			(3,365,988)
			
			(4,922,045)Proceeds from notes payable
			
			2,805,546
			
			3,458,242Issuances of common stock, net
			
			67,437
			
			130,051Dividends
			
			(422,959)
			
			(423,062)NET CASH USED IN
			FINANCING ACTIVITIES
			$
			(2,556,395)
			$
			(2,372,604)INCREASE (DECREASE) IN
			CASH AND CASH EQUIVALENTS
			
			1,581,063
			$
			(538,297)Cash and cash equivalents at beginning of year
			
			1,238,194
			
			1,776,491CASH AND CASH
			EQUIVALENTS AT END OF YEAR
			$
			2,819,257
			$
			1,238,194  See Notes to Consolidated Financial Statements.




18



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE A - Nature of Operations and Accounting
Policies

Investors Heritage Capital Corporation ("Investors
Heritage Capital") (formerly Kentucky Investors, Inc.) is
the holding company of Investors Heritage Life Insurance Company; Investors
Heritage Printing, Inc., a printing company; Investors Heritage Financial
Services Group, Inc., an insurance marketing company; is the sole member of At
Need Funding, LLC, a limited liability company that provides advance funding of
funerals in exchange for the irrevocable assignment of life insurance policies
from other nonaffiliated companies; and is the sole member of Heritage Funding,
LLC, a limited liability company that invests in various business ventures. 
These entities are collectively hereinafter referred to as the "Company".
 Approximately 99% of Investors Heritage Capital consolidated revenue is generated by
Investors Heritage Life.



The Company's operations involve the sale and
administration of various insurance and annuity products, including, but not
limited to, participating and non-participating whole life, limited pay life,
universal life, annuity contracts, credit life, credit accident and health and
group insurance policies.  The principal markets for the Company's products are
in the Commonwealths of Kentucky and Virginia, and the States of North Carolina,
South Carolina, Ohio, Indiana, Florida, Tennessee, Georgia and Michigan.



Basis of Presentation:  On December 22,
2009, the Company announced that it would restate its consolidated financial
statement.  The accompanying consolidated financial statements have been
restated for all periods presented.  The nature of the restatement and the
effect on the financial statement line items are discussed in Note L.  In
addition, certain disclosures in the following notes have been restated
consistent with the consolidated financial statements.  The accompanying
Consolidated Financial Statements of Investors Heritage Capital have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP").



Principles of Consolidation:  The
Consolidated Financial Statements include the accounts of the wholly-owned
subsidiaries of Investors Heritage Capital, which are Investors Heritage Life and its
subsidiary, Investors Underwriters, Inc., Investors Heritage Printing, Investors
Heritage Financial, At Need Funding and Heritage Funding.  Intercompany
transactions are eliminated in the Company's Consolidated Financial Statements.



Use of Estimates:  The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the Financial Statements and accompanying Notes. 
Actual results could differ from those estimates.



Investments:  The Company classifies all
fixed maturities and equity securities as available-for-sale.  Under Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", securities classified as
available-for-sale are carried at fair value with unrealized appreciation
(depreciation) relating to temporary market value changes recorded as an
adjustment to other comprehensive income (loss), net of deferred acquisition
costs and federal income taxes.



Premiums and discounts on fixed maturity
investments are amortized into income using the interest method.  Anticipated
prepayments on mortgage-backed securities are considered in the determination of
the effective yield on such securities.  If a difference arises between
anticipated prepayments and actual prepayments, the carrying amounts of the
investments are adjusted with a corresponding charge or credit to interest
income.



Realized gains and losses on the sales of
investments are determined based upon the specific identification method and
include provisions for other-than-temporary impairments where appropriate, as
discussed in further detail in Note B to the Consolidated Financial Statements.



If an other-than-temporary impairment occurs with
respect to a bond, the reduced book value is amortized back to the security's
expected recovery value over the remaining term of the bond.  The Company
continues to review the security for further impairment that would prompt
another write-down in the value.



Mortgage loans, policy loans and other long-term
investments are carried primarily at aggregate principal balance.  Short-term
investments represent securities with maturity dates within one year but
exceeding three months.  These securities are carried at amortized cost, which
approximates fair value.



Cash equivalents include money market funds on
deposit at various financial institutions with contractual maturity dates within
three months at the time of purchase.



Deferred Acquisition Costs:  Commissions and
other acquisition costs, which vary with and are primarily related to the
production of new business, are deferred and amortized over the life of the
related policies (refer to Revenues and Expenses discussed later regarding
amortization methods).  Recoverability of deferred acquisition



19



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





costs is evaluated periodically by comparing the
current estimate of the present value of expected pretax future profits to the
unamortized asset balance.  If this current estimate is less than the existing
balance, the difference is charged to expense.



Deferred acquisition costs related to annuities and universal life insurance
products are deferred to the extent deemed recoverable and amortized in relation
to the present value of actual and expected gross profits on the policies. To
the extent that realized gains and losses on fixed income securities result in
adjustments to deferred acquisition costs related to annuities, such adjustments
are reflected as a component of the amortization of deferred acquisition costs.



Deferred acquisition costs related to annuities are also adjusted, net of tax,
for the change in amortization that would have been recorded if the unrealized
gains (losses) from securities had actually been realized. This adjustment is
included in the change in net unrealized appreciation (depreciation) on
available-for-sale securities, a component of "Accumulated Other Comprehensive
Income (Loss)" in the stockholders' equity section of the balance sheet.



Present Value of Future Profits:  Present
value of future profits represents the estimated value assigned to the insurance
in force of the assumed policy obligations at the date of acquisition of a block
of policies.  The assigned value is amortized over the expected remaining life
of the insurance in force (which approximates a weighted average of 8 years). 
Accumulated amortization was $752,401 and $666,276 at December 31, 2008 and
2007, respectively.  Annual amortization for 2009 and 2010 will be approximately
$17,300 and $13,000, respectively.



Property and Equipment:  Property and
equipment is carried at cost less accumulated depreciation, using principally
the straight-line method.  Accumulated depreciation on property and equipment
was $3,593,227 and $3,431,610 at December 31, 2008 and 2007, respectively.



Capital Leases: During 2008, the Company
entered into three capital leases for office equipment. Total lease payments for
2008 and 2007 relating to new and previously existing capital leases were
$238,405 and $273,717, respectively. Future minimum lease payments for 2009,
2010 and 2011 are $180,034, $147,233, and $27,904, respectively.  The present
value of net minimum lease payments at December 31, 2008 was $284,307, which is
equal to the total future minimum lease payments of $355,171 less imputed
interest of $70,864. Accumulated amortization on the leased property was
$684,084 and $589,602 at December 31, 2008 and 2007, respectively.



Collateral on Securities Loaned:For
securities on loan, the Company holds cash collateral of 102% of the market
value of domestic securities on loan under its securities lending arrangement,
adjusted daily.  The cash collateral held is reported an asset with a
corresponding liability reported for the obligation to return such collateral
upon the return of the securities being loaned.



Cash Value of Company-Owned Life Insurance:
The Company holds life insurance policies on key members of the organization. 
These policies are reported at the current cash surrender values of the
policies.



Benefit Reserves and Policyholder Deposits: 
Reserves on traditional life and accident and health insurance products are
calculated using the net level premium method based upon estimated future
investment yields, mortality, withdrawals and other assumptions, including
dividends on participating policies.  The assumptions used for prior year issues
are locked in. Current year issues are reserved using updated assumptions
determined by reviewing the Company's past experience and include a provision
for possible unfavorable deviation.



Benefit reserves and policyholder deposits on
universal life and investment-type products are determined by using the
retrospective deposit method and represent the policy account value before
consideration of surrender charges.  In addition, unearned revenues are included
as a part of the benefit reserve.



The mortality assumptions for regular ordinary
business are based on the 1955-60 Basic Table, Select and Ultimate, for plans
issued prior to 1982; the 1965-70 Basic Table, Select and Ultimate, for plans
issued in 1982 through 1984; the 1975-80 Basic Table, Select and Ultimate, for
plans issued after 1984; and on the Company's experience for final expense and
preneed plans.



20



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Reinsurance:  The Company assumes and cedes
reinsurance under various agreements providing greater diversification of
business, allowing management to control exposure to potential losses arising
from large risks, and providing additional capacity for growth.  Amounts
recoverable from reinsurers are estimated in a manner consistent with the
related liabilities associated with the reinsured policies.  At December 31,
2008 and 2007, amounts recoverable from reinsurers were $49,899,675 and
$51,678,214, respectively.  These amounts included reserves ceded to reinsurers
of $48,988,910 and $50,776,407 at December 31, 2008 and 2007, respectively, in
accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts".



Unearned Premium Reserves:  Credit life
unearned premium reserves are calculated for level and reducing coverage
certificates using the monthly pro rata and Rule of 78's methods, respectively. 
Credit accident and health unearned premium reserves are determined based upon
the Rule of 78's.



Policy Claims:  Policy claims are based on
reported claims plus estimated incurred but not reported claims developed from
trends of historical data applied to current exposure.



Liability for Deposit-Type Contracts: 
Liability for deposit-type contracts consists of supplemental contracts without
life contingencies, premium deposit funds and dividends and endowments left on
deposit at interest.



Participating Policies:Participating
business approximates 7% of ordinary life insurance in force.  Participating
dividends are accrued as declared by the Board of Directors of Investors
Heritage Life.  The liability for future policy benefits for participating
policies was determined based on the Net Level Premium Reserve Method, 3%
interest, and the 1941 CSO Mortality and 1958 CSO Mortality tables.  All
guaranteed benefits were considered in calculating these reserves.  Deferred
acquisition costs are amortized in proportion to expected gross profits.



The average assumed investment yields used in
determining expected gross profits ranged from 3.56% to 9.17% (for the current
and all future years, an assumed investment yield of 5% was utilized).



Federal Income Taxes:  To account for income
taxes, the Company utilizes the liability method in accordance with SFAS No.
109, "Accounting for Income Taxes."  Under such method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and the tax bases of assets and liabilities and are measured using the
enacted tax rates.



Revenues and Expenses:  Revenues on
traditional life and accident and health insurance products consist of direct
and assumed premiums reported as earned when due.  Liabilities for future policy
benefits, including unearned premium reserves on accident and health policies
and unreleased profits on limited-pay life policies, are provided and
acquisition costs are amortized by associating benefits and expenses with earned
premiums to recognize related profits over the life of the contracts. 
Acquisition costs are amortized over the premium paying period using the net
level premium method.  Traditional life insurance products are treated as long
duration contracts since they are ordinary whole life insurance products, which
generally remain in force for the lifetime of the insured.  The accident and
health insurance products are treated as long duration contracts because they
are non-cancelable.



Revenues for universal life and investment-type
products consist of investment income and policy charges for the cost of
insurance and policy initiation and administrative fees.  Expenses include
interest credited to policy account balances, actual administrative expenses and
benefit payments in excess of policy account balances.



Other income consists principally of servicing and
administration fees relative to credit insurance administered for our reinsurers. 
Third party administrative fees are also included within other income.



Stock Option and Stock Appreciation Rights
Plan:We account for our stock-based incentive programs under SFAS No.
123(R), "Share-Based Payment." SFAS No. 123(R) requires all share-based
payments to employees to be recognized as compensation expense in the
consolidated income statement.  The Company adopted the provisions of SFAS No.
123(R) using the modified prospective method in which compensation expense is
recognized based on the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," for all awards granted to



21



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





employees prior to January 1, 2006. Under this
method, the Company's stock-based compensation is reported in the balance sheets
as a liability based on the intrinsic value of the compensation, and
compensation expense is measured as the change in intrinsic value.



Common Stock and Earnings per Share:  The
par value per share is $1.00 with 4,000,000 shares authorized. Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year.  The weighted average number of
shares outstanding during 2008 and 2007 were 1,116,882 and 1,113,412 shares,
respectively.  Cash dividends per share were $.38 in 2008 and 2007.



Accumulated Other Comprehensive Income (Loss):
SFAS No. 130, "Reporting Comprehensive Income," requires the inclusion of
unrealized gains or losses on available-for-sale securities in other
comprehensive income.  The reclassification amounts for the years ended December
31, 2008 and 2007 are summarized as follows:



2008
			
			2007Net unrealized gain (loss) arising during period
			$
			(6,096,300)
			$
			1,845,950Reclassification adjustment for net losses
			(gains)included in net income
			
			4,132,029
			
			(136,160)Net unrealized gain (loss) on available-for-sale
			securities
			$
			(1,964,271)
			$
			1,709,790




New Accounting Standards:In September 2006,
the FASB issued SFAS No. 157, "Fair Value Measurements."  SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements.  It applies to other pronouncements
that require or permit fair value but does not require any new fair value
measurements.  The statement defines fair value as "the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date."  SFAS No. 157
establishes a fair value hierarchy to increase consistency and comparability in
fair value measurements and disclosures.  The hierarchy is based on the inputs
used in valuation and gives the highest priority to quoted prices in active
markets.  The highest possible level should be used to measure fair value.  SFAS No.
157 is effective for fiscal years beginning after November 15, 2007 (January 1,
2008 for the Company).  In February 2008, the FASB issued FASB Staff Position
FAS 157-2, "Effective Date of FASB Statement No. 157," which provides a
one-year deferral of the application of SFAS No. 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually).  The Company adopted SFAS No. 157 and FAS 157-2 effective January 1,
2008.  The adoption of these standards did not have a material effect on the
Company's results of operations, financial position or liquidity.



In October 2008, the FASB issued FASB Staff
Position FAS 157-3, "Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active."  FAS 157-3 clarifies the application
of SFAS No. 157 in a market that is not active and amends SFAS No. 157 by adding
an illustrative example of key considerations used in determining the fair value
of a financial asset when the market for that financial asset is not active. 
FAS 157-3 was effective upon issuance and did not have a material impact on our
financial position or results of operations.



In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities."  SFAS No. 159 permits an entity
to irrevocably elect fair value on a contract-by-contract basis as the initial
and subsequent measurement attribute for many financial assets and liabilities
and certain other items.  Entities electing the fair value option would be
required to recognize changes in fair value in earnings and to expense up-front
costs and fees associated with the item for which the fair value option is
elected.  Entities electing the fair value option are required to distinguish on
the face of the balance sheet the fair value of assets and liabilities for which
the fair value option has been elected and similar assets and liabilities
measured using another measurement attribute.  An entity can accomplish this by
either reporting the fair value and non-fair value carrying amounts as separate
line items or aggregating those amounts and disclosing parenthetically the
amount of fair value included in the aggregate amount.



22



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





SFAS No.
159 is effective for fiscal years beginning after November 15, 2007 (January 1,
2008 for the Company).  Upon adoption, an entity was permitted to elect the fair
value option irrevocably for any existing asset or liability within the scope of
the standard.  The adjustment to reflect the difference between the fair value
and the carrying amount would be accounted for as a cumulative-effect adjustment
to retained earnings as of the date of initial adoption.  Retrospective
application would not be permitted.  The Company did not elect the fair value
option for assets and liabilities currently held upon its adoption of SFAS No.
159.  SFAS No. 159 did not have an impact on the Company's results of
operations, financial position or liquidity.



In December 2007, the FASB issued SFAS No. 141
(Revised 2007),"Business Combination,"or SFAS No. 141R. SFAS No. 141R
significantly changes the accounting for business combinations. Under SFAS No.
141R, an acquiring entity is required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141R changes the accounting treatment for certain
specific items including expensing transaction and restructuring costs and
adjusting earnings in periods subsequent to the acquisition for changes in
deferred tax asset valuation allowances and income tax uncertainties as well as
changes in the fair value of acquired contingent liabilities. SFAS No. 141R also
includes a substantial number of new disclosure requirements. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date is
on or after January 1, 2009 with early adoption prohibited. Accordingly,
we are required to record and disclose business combinations in accordance with
existing GAAP until January 1, 2009. The effect of these new requirements on our
financial position and results of operations will depend on the volume and terms
of acquisitions in 2009 and beyond, but will likely increase the amount and
change the timing of recognizing expenses related to acquisition activities.



In January 2009, the FASB issued FASB Staff
Position EITF 99-20-1, "Amendments to the Impairment Guidance of EITF Issue
No. 99-20."  EITF 99-20-1 affects all entities with certain beneficial
interests in securitized financial assets within the scope of EITF Issue
No. 99-20. In determining other-than-temporary-impairment, Issue 99-20 requires
reliance on market participant assumptions about future cash flows. While SFAS No. 115
uses these same assumptions, it permits the use of reasonable management
judgment on the probability that the holder will be unable to collect all
amounts due. EITF 99-20-1 brings the impairment model on beneficial interest
held by a transferor in securitized financial assets to be similar to the
impairment model of SFAS No. 115.  EITF 99-20-1 is effective for interim and
annual reporting periods ending after December 15, 2008. The adoption of this
standard did not have a material impact on our financial position or results of
operations.



In December 2008, the FASB issued SFAS 132(R)-1, "Employer's Disclosures about Postretirement Benefit Plan Assets." This
statement amends SFAS No. 132(R), "Employers' Disclosures about Pensions and
Other Postretirement Benefits -- An Amendment of FASB Statements No. 87, 88, and
106" to require more detailed disclosures about plan assets of a defined
benefit pension or other postretirement plan, including investment strategies;
major categories of plan assets; concentrations of risk within plan assets;
inputs and valuation techniques used to measure the fair value of plan assets;
and the effect of fair-value measurements using significant unobservable inputs
on changes in plan assets for the period. SFAS 132(R)-1 is effective for fiscal
years ending after December 15, 2009, with earlier application permitted. We do
not expect the adoption of this standard to have an effect on our financial
position or results of operations.



Reclassifications: Certain prior year
amounts have been reclassified to conform to the current year presentation.



NOTE B - Investments

The Company limits credit risk by investing
primarily in investment grade securities and by diversifying its investment
portfolio among government and corporate bonds and mortgage loans.  The Company
manages its fixed income portfolio to diversify between and within industry
sectors.  Mortgage loans, exclusive of insured or guaranteed mortgages, are
issued at loan to value ratios not exceeding 80 percent.  Approximately
$7,478,000 and $6,148,000 of the loans outstanding at December 31, 2008 were to
borrowers located in Kentucky and Florida, respectively.  All loans are secured
by a first mortgage on the property.



23



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Investments in available-for-sale securities at
December 31 are summarized as follows:



Gross
			
			Gross Unrealized Losses2008
			
			Amortized
			
			Unrealized
			
			Less Than
			
			Greater Than
			
			FairCost
			
			Gains
			
			12 Months
			
			12 Months
			
			ValueAvailable-for-sale
			securities:U.S. government obligations
			$
			22,387,095
			$
			2,763,378
			$
			-
			$
			-
			$
			25,150,473States and political subdivisions
			
			22,443,720
			
			521,626
			
			102,320
			
			109,990
			
			22,753,036Corporate
			
			152,048,424
			
			3,409,174
			
			1,969,824
			
			4,313,774
			
			149,174,000Foreign
			
			20,735,082
			
			2,403,250
			
			207,574
			
			319,957
			
			22,610,801Mortgage-backed securities
			
			64,721,305
			
			2,028,284
			
			181,872
			
			825,651
			
			65,742,066Total fixed maturity securities
			$
			282,335,626
			$
			11,125,712
			$
			2,461,590
			$
			5,569,372
			$
			285,430,376Equity securities
			
			4,040,062
			
			436,404
			
			538,289
			
			-
			
			3,938,177Total
			$
			286,375,688
			$
			11,562,116
			$
			2,999,879
			$
			5,569,372
			$
			289,368,553Gross
			
			Gross Unrealized Losses2007
			
			Amortized
			
			Unrealized
			
			Less Than
			
			Greater Than
			
			FairCost
			
			Gains
			
			12 Months
			
			12 Months
			
			ValueAvailable-for-sale
			securities:U.S. government obligations
			$
			37,666,032
			$
			1,805,262
			$
			-
			$
			585
			$
			39,470,709States and political subdivisions
			
			17,316,719
			
			536,998
			
			80
			
			64,159
			
			17,789,478Corporate
			
			149,040,917
			
			4,251,222
			
			204,850
			
			2,156,377
			
			150,930,912Foreign
			
			20,811,896
			
			1,727,190
			
			89,780
			
			36,345
			
			22,412,961Mortgage-backed securities
			
			59,174,717
			
			508,176
			
			27,079
			
			403,023
			
			59,252,791Total fixed maturity securities
			$
			284,010,281
			$
			8,828,848
			$
			321,789
			$
			2,660,489
			$
			289,856,851Equity securities
			
			3,850,263
			
			684,202
			
			199,402
			
			-
			
			4,335,063Total
			$
			287,860,544
			$
			9,513,050
			$
			521,191
			$
			2,660,489
			$
			294,191,914




The following table summarizes, for all securities
in an unrealized loss position at December 31, 2008 and 2007, the estimated fair
value, pre-tax gross unrealized loss and number of securities by length of time
that those securities have been continuously in an unrealized loss position.



December 31, 2008
			
			
			December 31, 2007Gross
			
			
			
			
			
			
			GrossEstimated
			
			Unrealized
			
			Number of
			
			
			Estimated
			
			Unrealized
			
			Number ofFair Value
			
			Loss
			
			Securities
			
			
			Fair Value
			
			Loss
			
			SecuritiesFixed Maturities:Fewer than 6 months
			$
			29,639,437
			$
			1,137,770
			
			29
			
			$
			10,785,483
			$
			120,084
			
			107-12 months
			
			23,011,682
			
			1,323,820
			
			22
			
			
			9,945,930
			
			201,705
			
			6Greater than 12 months
			
			33,855,448
			
			5,569,372
			
			47
			
			
			70,596,887
			
			2,660,489
			
			102Total fixed maturities
			
			86,506,567
			
			8,030,962
			
			98
			
			
			91,328,300
			
			2,982,278
			
			118Equities:Fewer than 6 months
			
			1,520,803
			
			538,289
			
			3
			
			
			1,604,658
			
			199,402
			
			27-12 months
			
			-
			
			-
			
			-
			
			
			-
			
			-
			
			-Greater than 12 months
			
			-
			
			-
			
			-
			
			
			-
			
			-
			
			-Total equities
			
			1,520,803
			
			538,289
			
			3
			
			
			1,604,658
			
			199,402
			
			2Total
			$
			88,027,370
			$
			8,569,251
			
			101
			
			$
			92,932,958
			$
			3,181,680
			
			120




As of December 31, 2008, all of the above fixed
maturity securities had a fair value to cost ratio equal to or greater than 61%
and the equity securities noted above had a fair value to cost ratio of over
65%.   As of December 31, 2007, all of the above fixed maturity securities had a
fair value to cost ratio equal to or greater than 83% and the equity securities
noted above had a fair value to cost ratio of over 88%.





24



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





The Company's decision to record an impairment loss
is primarily based on whether the security's fair value is likely to remain
significantly below its book value in light of all the factors considered.
Factors that are considered include the length of time the security's fair value
has been below its carrying amount, the credit worthiness of the issuer, and the
coupon and/or dividend payment history of the issuer.  For any securities that
are other-than-temporarily impaired, the security is adjusted to fair
value and the resulting losses are recognized in realized gains/losses in the
consolidated statements of income.



During 2008, the Company realized the following
other-than-temporary impairments ("OTTI"):



--          During the third quarter, the Company
recognized OTTI for two Lehman Brothers Holdings bonds given their sudden
bankruptcy filing.  This impairment generated a pre-tax realized loss of
$3,558,156.  The Company is amortizing these bonds up to an expected recovery
amount of 50% of their par value based on our analysis of the liquidation
process.  The Company will continue to monitor this process for changes in this
estimate that would necessitate a change in the amortization process.



--          During the fourth quarter, the Company
recognized OTTI for six bonds related to Bank of America and JP Morgan.  These
six bonds were impaired on the basis that we do not intend to hold the bonds to
recovery in value or to maturity.  Rather, these bonds are expected to be
liquidated in 2009 in order to limit our exposure to those positions in light of
recent mergers that have expanded our exposures beyond our internal investment
guidelines.  These six bond impairments generated a pre-tax realized loss of
$409,483.



--          Finally, during the fourth quarter, the
Company recognized OTTI for two Fifth Third mutual fund holdings due to the
severity and length of the decline in their market values.  This impairment
generated a total pre-tax impairment charge of $917,650.  We expect to continue
to hold these mutual funds, however, no support can be documented to evidence
that they will completely recover in value in the near term.



Based on an analysis of the criteria previously
discussed, none of the securities, other than those previously impaired,
including securities with unrealized losses greater than 12 months in age, are
believed to be other-than-temporarily impaired at December 31, 2008.  Management
believes that the Company will fully recover its cost basis in these securities
held at December 31, 2008, and has the ability and intent to hold such
securities until they recover or mature.  The remaining temporary impairments
shown herein are primarily the result of the current interest rate environment
rather than credit factors that would imply other-than-temporary impairment.  No
impairment losses were included in net realized investment gains in 2007.



In accordance with SFAS No. 115, net unrealized
gains for investments classified as available-for-sale are presented below, net
of the effect on deferred income taxes and deferred acquisition costs assuming
that the appreciation had been realized.



December 312008
			
			
			2007Net unrealized appreciation onavailable-for sale securities
			$
			2,992,865
			
			$
			6,331,370Adjustment to deferred acquisition costs
			
			(154,982)
			
			
			(488,471)Deferred income taxes
			
			(1,383,722)
			
			
			(2,424,467)Net unrealized appreciation onavailable-for sale securities
			$
			1,454,161
			
			$
			3,418,432




25



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





The amortized cost and fair value of debt
securities at December 31, 2008, by contractual maturity, are presented below. 
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.



Available-for-SaleAmortized
			
			
			FairCost
			
			
			ValueDue in one year or less
			$
			11,288,360
			
			$
			11,393,525Due after one year through five years
			
			99,689,261
			
			
			101,194,272Due after five years through ten years
			
			83,670,037
			
			
			81,769,498Due after ten years
			
			22,966,663
			
			
			25,331,015Due at multiple maturity dates
			
			64,721,305
			
			
			65,742,066Total
			$
			282,335,626
			
			$
			285,430,376




Proceeds during 2008 and 2007 from sales and
maturities of investments in available-for-sale securities were $35,712,786 and
$14,509,329, respectively.  Gross gains of $756,985 and $140,149 and gross
losses of $3,725 and $3,989 were realized on those sales during 2008 and 2007,
respectively.



Presented below is investment information,
including the accumulated and annual change in net unrealized investment gains
or losses.  Additionally, the table shows the annual change in net unrealized
investment gains (losses) and the amount of realized investment gains (losses)
on debt and equity securities for the years ended December 31, 2008 and 2007.



2008
			
			
			2007Change in unrealized
			investment gains (losses):Available-for-sale:Fixed maturities
			$
			(2,751,823)
			
			$
			3,118,840Equity securities
			
			(586,685)
			
			
			(164,326)Realized investment
			gains (losses):Available-for-sale:Fixed maturities
			$
			(3,280,884)
			
			$
			16,894Equity securities
			
			(851,145)
			
			
			119,266




Major categories of net investment income are
summarized as follows:



2008
			
			
			2007Fixed maturities
			$
			15,920,177
			
			$
			16,110,351Mortgage loans on real estate
			
			1,745,876
			
			
			1,830,213Other
			
			945,136
			
			
			948,560$
			18,611,189
			
			$
			18,889,124Investment expenses
			
			863,383
			
			
			837,488$
			17,747,806
			
			$
			18,051,636




The Company is required to hold assets on deposit
for the benefit of policyholders in accordance with statutory rules and
regulations.  At December 31, 2008 and 2007, these required deposits had a total
amortized cost of $22,824,241 and $22,916,096, respectively.



The Company participates in a securities lending
program with third parties, mostly large brokerage firms, primarily for
investment yield enhancement purposes.  Securities loaned are treated as
financing arrangements and the unrestricted collateral received is recorded as
an asset, with an offsetting liability recorded for the Company's obligation to
return the collateral.  The Company obtains collateral in an amount equal to
102% of the fair value of domestic securities loaned, monitors the market value
of securities loaned on a daily basis and obtains additional collateral as
necessary.  The collateral associated with loaned securities is generally
invested in overnight repurchase agreements.  During the fourth quarter of 2008,
the Company suspended participation in this program given the uncertainty in the
current market.  Accordingly, there were no securities on loan under this
agreement at



26



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2008.  At December 31, 2007, there
were securities on loan under this agreement with a market value of $2,124,160,
with associated collateral held of $2,186,372.  Income earned relative to this
program was $22,690 and $26,705 for the years ended December 31, 2008 and 2007,
respectively.



During 2005, the Company purchased an interest rate
cap for $22,000.  This cap is used to hedge the Company's exposure to interest
rate risk on its floating rate bank note outstanding in the amount of $484,757. 
The cap effectively limits the interest rate on the bank note to 6.5% and
expires June 1, 2010, in conjunction with the final payment on the bank note. 
The Company designed the terms of the cap to mirror the terms of the outstanding
debt such that the cap would be a highly effective cash flow hedge.  The Company
accounts for the cap in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended.  SFAS No. 133 provides that the effective portion of the gain or loss
on a derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of other comprehensive income and be
reclassified into earnings in the same period or periods during which the
transaction affects earnings.  The remaining gain or loss on the derivative
instrument, if any, relative to the ineffective portion of the hedge must be
recognized currently in earnings.  At December 31, 2008 and 2007, the interest
rate cap was highly effective at hedging increases in interest rates above the
cap rate and therefore, the effective portion of the change in value was
included within other comprehensive income (loss).  The value of the cap, which
is reported in the consolidated balance sheet within other assets, was $0 and
$1,603 at December 31, 2008 and 2007, respectively.  There was a credit to other
comprehensive income of $3,113 for 2008 and a charge to other comprehensive
income of $10,157 for 2007 associated with the change in the market value of the
interest rate cap.  Income earned relative to the cap totaled $0 and $5,671
during 2008 and 2007, respectively.



NOTE C - Fair Values of Financial Instruments

Effective January 1, 2008, the Company adopted SFAS
No. 157.  SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements.  Fair value
is defined under SFAS No. 157 as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  The Company experienced no
material financial impact as a result of the adoption of SFAS No. 157.



The Company holds fixed maturities and equity
securities that are measured and reported at fair market value on the balance
sheet.  The Company determines the fair market values of its financial
instruments based on the fair value hierarchy established in SFAS No. 157 that
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.  The standard describes three
levels of inputs that may be used to measure fair value, as follows:



Level 1 - Quoted prices in active markets
for identical assets or liabilities. The Company's Level 1 assets and
liabilities include debt and equity securities that are traded in an active
exchange market, as well as certain U.S. Treasury securities that are highly
liquid and are actively traded in over-the-counter markets.



Level 2 - Observable inputs other than Level
1 prices, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. The Company's Level 2 assets and liabilities include debt
securities with quoted prices that are traded less frequently than
exchange-traded instruments or assets and liabilities whose value is determined
using a pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. This
category generally includes U.S. Government and agency mortgage-backed debt
securities and corporate debt securities.



Level 3 - Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. The Company's Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation. This category generally includes certain
private equity investments and asset-backed securities where independent pricing
information was not able to be obtained for a significant portion of the
underlying assets.



27



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





In accordance with SFAS No. 157, the Company has
categorized its financial instruments, based on the priority of the inputs to
the valuation technique, into the three-level fair value hierarchy.  If the
inputs used to measure the financial instruments fall within different levels of
the hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.  A review of fair
value hierarchy classifications is conducted on a quarterly basis. Changes in
the valuation inputs, or their ability to be observed, may result in a
reclassification for certain financial assets or liabilities. Reclassifications
impacting Level 3 of the fair value hierarchy are reported as transfers in/out
of the Level 3 category as of the beginning of the quarter in which the
reclassifications occur.



The following table presents the Company's fair
value hierarchy for those financial instruments measured at fair value on a
recurring basis as of December 31, 2008.



Level 1
			
			Level 2
			
			Level 3
			
			TotalAssets:Fixed maturities
			$
			-
			$
			277,204,295
			$
			8,226,081
			$
			285,430,376Equity securities
			
			3,595,777
			
			-
			
			342,400
			
			3,938,177




Level 3 financial instruments consist of four
corporate bonds, one mortgage-backed bond, and two asset-backed bonds as well as
one preferred stock and one common stock, where trading has been limited.  The
fair values for these securities were primarily determined through the use of
non-binding broker quotes and internal models using unobservable assumptions
about market participants.  The following table provides a summary of changes in
fair value of our Level 3 financial instruments for the year ended December 31,
2008.



January 1,
			
			Realized
			
			Unrealized
			
			
			
			
			
			December 31,2008
			
			Gains
			
			Gains
			
			Purchases
			
			Transfers
			
			2008Balance
			
			(Losses)
			
			(Losses)
			
			(Sales)
			
			In (Out)
			
			BalanceAssets:Fixed maturities
			$
			6,940,640
			$
			-
			$
			(83,975)
			$
			774,945
			$
			594,471
			$
			8,226,081Equity securities
			
			320,000
			
			-
			
			22,400
			
			-
			
			-
			
			342,400




The unrealized gains (losses) on level 3
investments are recorded as a component of accumulated other comprehensive
income (loss), net of tax, in accordance with required accounting for our
available-for-sale portfolio.



The following disclosure of the estimated fair
values of financial instruments, as of December 31, 2008 and 2007, is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments."  The estimated fair value amounts have been
determined using available market information and appropriate valuation
methodologies.  However, considerable judgment was required to interpret market
data to develop these estimates.  Accordingly, the estimates are not necessarily
indicative of the amounts which could be realized in a current market exchange. 
The use of different market assumptions or estimation methodologies may have a
material effect on the fair value amounts.



28



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2008
			
			2007Carrying
			
			Fair
			
			Carrying
			
			FairAmount
			
			Value
			
			Amount
			
			ValueAssets:Fixed maturities
			$
			285,430,376
			$
			285,430,376
			$
			289,856,851
			$
			289,856,851Equity securities
			
			3,938,177
			
			3,938,177
			
			4,335,063
			
			4,335,063Mortgage loans on real
			estate:Commercial
			
			22,480,039
			
			23,517,378
			
			24,771,936
			
			24,974,970Residential
			
			32,399
			
			35,509
			
			40,509
			
			41,885Policy loans
			
			6,971,949
			
			6,971,949
			
			6,968,157
			
			6,968,157Other long-term
			investments
			
			1,021,741
			
			1,021,741
			
			878,036
			
			878,036Short-term investments
			
			25,000
			
			25,000
			
			25,000
			
			25,000Cash and cash equivalents
			
			2,819,257
			
			2,819,257
			
			1,238,194
			
			1,238,194Accrued investment income
			
			4,338,974
			
			4,338,974
			
			4,668,922
			
			4,668,922Collateral on securities
			loaned
			
			-
			
			-
			
			2,186,372
			
			2,186,372Cash value of
			company-ownedlife insurance
			
			7,764,223
			
			7,764,223
			
			6,845,039
			
			6,845,039Liabilities:Policyholder deposits(Investment-type
			contracts)
			$
			51,491,954
			$
			48,926,107
			$
			51,326,124
			$
			49,822,103Policy claims
			
			1,504,744
			
			1,504,744
			
			1,476,669
			
			1,476,669Obligations under capital
			leases
			
			284,307
			
			284,307
			
			371,736
			
			371,736Notes payable
			
			3,701,506
			
			3,485,607
			
			4,261,948
			
			4,161,631




The following methods and assumptions were used in
estimating the "fair value" disclosures for financial instruments in the
accompanying Financial Statements and Notes thereto:



Fixed maturities and equity securities:  The
fair values for fixed maturities and equity securities (including redeemable
preferred stocks) are based on the principles required by SFAS No. 157, as
previously discussed.



Mortgage loans on real estate:  The fair
values for mortgage loans are estimated using discounted cash flow analyses,
using the actual spot rate yield curve in effect at December 31.



Cash and cash equivalents, short-term
investments, policy loans, accrued investment income, other long-term
investments and collateral on securities loaned:  The carrying amounts
reported for these financial instruments approximate their fair values.



Cash value of company-owned life insurance: 
The carrying values and fair values for these policies are based on the current
cash surrender values of the policies.



Investment-type contracts:  For 2008, in
accordance with SFAS No. 157, the fair value for liabilities under
investment-type insurance contracts (accumulation annuities) is calculated using
a discounted cash flow approach.  Cash flows were projected using actuarial
assumptions and discounted to the valuation date using risk-free rates adjusted
for credit risk and the nonperformance risk of the liabilities.  In 2007 and
prior years, the fair value was calculated as the surrender value.



Policy claims and obligations under capital
leases:  The carrying amounts reported for these liabilities approximate
their fair value.



Notes payable:  The fair values for notes
payable on commercial loans with fixed interest rates are estimated using
discounted cash flow analyses, assuming current interest rate assumptions for
similar borrowings based on information gathered from market loan brokers.  The
fair value for notes payable with floating interest rates and promissory notes
approximate the unpaid principal balances on such notes.



The fair values for insurance contracts other than
investment contracts are not required to be disclosed under SFAS No. 107.



29



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE D - Federal Income Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. 
Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows:



2008
			
			2007Deferred tax
			liabilities:Policy acquisition costs
			$
			4,568,305
			$
			4,698,453Net unrealized gain on
			available-for-sale securities
			
			1,383,722
			
			2,424,467Due premiums
			
			1,257,239
			
			1,309,280Other
			
			1,011,562
			
			1,225,426Total deferred tax
			liabilities
			$
			8,220,828
			$
			9,657,626Deferred tax assets:Benefit reserves
			$
			1,675,044
			$
			1,721,961Remaining 807(f) reserve
			adjustment
			
			442,230
			
			589,640Other policyholder funds
			
			328,934
			
			300,162AMT credit carry forwards
			
			395,541
			
			422,786Accrued pension liability
			
			1,918,260
			
			734,371Other-than-temporary
			impairments
			
			1,627,460
			
			-Other
			
			981,253
			
			1,063,491Total deferred tax
			assets
			$
			7,368,722
			$
			4,832,411Net deferred
			tax liability
			$
			852,106
			$
			4,825,215




The Company periodically reviews its gross deferred
tax assets for recoverability.  At December 31, 2008 and 2007, the Company is
able to demonstrate that the benefit of its gross deferred tax assets is fully
recoverable.



The reconciliation of income tax attributable to
operations computed at the federal statutory tax rate to income tax expense is
as follows:



2008
			
			2007Statutory federal income tax rate
			34.0
			%
			
			34.0
			%Small life insurance company deduction
			10.6
			%
			
			(4.2)
			%Dividends-received deduction
			1.6
			%
			
			(2.0)
			%Defined contribution plan dividend
			1.4
			%
			
			(1.7)
			%Nondeductible COLI expense
			2.4
			%
			
			0.6
			%Other
			(3.3)
			%
			
			(3.9)
			%Effective income tax rate
			46.7
			%
			
			22.8
			%




We file U.S. federal income tax returns and income tax returns in various state
jurisdictions. Our 2005, 2006 and 2007 U.S. federal tax years remain subject to
income tax examination by tax authorities.  We have no known uncertain tax
benefits within our provision for income taxes. In addition, we do not believe
the Company will be subject to any penalties or interest relative to any open
tax years and, therefore, have not accrued any such amounts.  However, it is our
policy to classify any interest and penalties (if applicable) as income tax
expense in the financial statements.



The Company made income tax payments of $365,000 and $220,873 relative to the
2008 and 2007 tax years, respectively.



30



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE E - Notes Payable

Effective June 30, 2008, the Company renewed its At
Need Funding line of credit and the Investors Heritage Capital line of credit.  The At
Need Funding line of credit is in the amount of $2,000,000 with interest to be
paid monthly at the prime rate, renewable annually.  The purpose of this line of
credit is to provide advance funding for funerals in exchange for an irrevocable
assignment of life insurance policies from other unaffiliated insurance
companies.  The Investors Heritage Capital line of credit is in the amount of $150,000
with interest to be paid monthly at the prime rate, renewable annually.  This
line of credit is for general corporate purposes.



On June 1, 2005, Investors Heritage Capital renewed its
existing bank note in the amount of $1,434,257 with interest to be paid monthly
at a rate of 1% under the prime rate.  In conjunction with this note,
Investors Heritage Capital purchased an interest rate cap to hedge exposure to interest rate
risk.  The interest rate cap limits the interest rate that can be charged over
the remaining term to 6.5%.



On February 3, 2005, Investors Heritage Capital borrowed
$3,650,000 to finance the purchase of certain home office property previously
owned by Investors Heritage Life at a purchase price of $3,650,000.  The note is
an amortizing loan with a fixed interest rate of 5.05% and with a maturity date
of March 1, 2015.  The proceeds received by Investors Heritage Life were used to
repay their surplus notes to Investors Heritage Capital.  Additionally,
Investors Heritage Capital used such proceeds to repay the $3,000,000 bank note outstanding at
December 31, 2004.  This transaction was approved by the Kentucky Department of
Insurance.



On November 23, 2004, the Company issued a
promissory note in the amount of $643,200 with an interest rate of 4%, due
December 31, 2008.  The note was issued in exchange for common stock from one of
its board members.  This note was fully paid during 2008.  Interest expense on
this note in 2008 was $1,077.



On February 4, 2008, the Company issued a
promissory note in the amount of $135,600 with an interest rate of 4%, due
February 4, 2012.  This note was issued in exchange for a block of common stock
from one of its stockholder's under the right of first refusal.



Information relative to the Company's notes payable
at December 31, 2008 and 2007 is as follows:



2008Outstanding
			
			Current
			
			Maturity
			
			Interest
			
			InterestPrincipal
			
			Interest Rate
			
			Date
			
			Expense
			
			PaidMortgage note
			$
			2,491,246
			
			5.05%
			
			3/1/2015
			$
			133,532
			$
			134,924At Need Funding line of
			credit
			
			589,903
			
			3.25%
			
			6/30/2009
			
			32,503
			
			32,737Bank note
			
			484,757
			
			2.25%
			
			6/2/2010
			
			27,111
			
			30,429Promissory note
			
			135,600
			
			4.00%
			
			2/4/2012
			
			4,912
			
			-2007Outstanding
			
			Current
			
			Maturity
			
			Interest
			
			InterestPrincipal
			
			Interest Rate
			
			Date
			
			Expense
			
			PaidMortgage note
			$
			2,821,961
			
			5.05%
			
			3/1/2015
			$
			149,854
			$
			151,177At Need Funding line of
			credit
			
			568,002
			
			6.75%
			
			6/30/2008
			
			66,614
			
			73,664Bank note
			
			808,757
			
			6.25%
			
			6/2/2010
			
			68,667
			
			71,331Promissory note - related
			party
			
			59,819
			
			4.00%
			
			12/31/2008
			
			9,537
			
			9,862Auto loan
			
			3,409
			
			0.00%
			
			6/12/2008
			
			-
			
			-




NOTE F - Employee Benefit Plans

The Company sponsors a noncontributory pension plan
which covers substantially all employees.  Benefits are based on years of
service and the highest consecutive 60 months average earnings within the last
120 months of credited service.  Benefits are funded based on
actuarially-determined amounts.



31



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





The following table provides additional details for
the Company on a consolidated basis as of December 31.



2008
			
			2007Change in projected
			benefit obligation:Benefit obligation at
			beginning of year
			$
			13,059,776
			$
			12,944,476Service cost
			
			370,911
			
			364,197Interest cost
			
			872,215
			
			741,905Actuarial (gain) loss
			
			734,352
			
			(642,126)Benefits paid
			
			(276,283)
			
			(348,676)Benefit obligation at end
			of year
			$
			14,760,971
			$
			13,059,776Change in plan assets:Fair value of plan assets
			at beginning of year
			$
			10,899,862
			$
			10,097,283Actual return on plan
			assets
			
			(2,357,449)
			
			498,335Employer contribution
			
			852,900
			
			652,920Benefits paid
			
			(276,283)
			
			(348,676)Fair value of plan assets
			at end of year
			$
			9,119,030
			$
			10,899,862Funded status
			$
			(5,641,941)
			$
			(2,159,914)Unrecognized net
			actuarial loss
			
			-
			
			-Accrued pension liability
			$
			(5,641,941)
			$
			(2,159,914)Components of net
			periodic benefit cost:Service cost
			$
			370,911
			$
			364,197Interest cost
			
			872,215
			
			741,905Expected return on plan
			assets
			
			(917,871)
			
			(863,037)Recognized actuarial net
			loss
			
			246,804
			
			203,068Net periodic benefit cost
			$
			572,059
			$
			446,133Accumulated benefit
			obligation
			$
			12,925,916
			$
			11,474,234




The portion of the accrued pension liability
included in accumulated other comprehensive loss at December 31, 2008 is
$6,044,697, which has been recorded net of related tax of $2,055,197.  The
portion of the accrued pension liability included in accumulated other
comprehensive income at December 31, 2007 is $2,281,829, which has been recorded
net of related tax of $775,822.  These amounts are solely the result of
unamortized actuarial net losses not yet amortized into income.



Amounts recognized in other comprehensive income
(loss) for the year ended December 31 are as follows:



2008
			
			2007Net gain (loss)
			$
			(4,009,672)
			$
			277,424Amortization of actuarial net loss
			
			246,804
			
			203,068(3,762,868)
			
			480,492Deferred federal income tax
			
			1,279,375
			
			(163,367)Total recognized in other comprehensive
			income
			$
			(2,483,493)
			$
			317,125




The estimated net loss that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost
during 2009 is $559,192.



Weighted-average actuarial assumptions used at
December 31, 2008 and 2007 to determine benefit obligations and net periodic
benefit cost are as follows:



December 312008
			
			2007Discount rate
			6.50%
			
			6.25%Expected return on plan assets
			8.30%
			
			8.60%Rate of compensation increases
			4.00%
			
			4.00%




32



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





The long-term rate of return for plan assets is
determined based on an analysis of historical returns on invested assets,
anticipated future fixed income, equity and mortgage loan investment markets,
and diversification needs.  Long term trends are evaluated relative to current
market factors such as inflation, interest rates and investment strategies,
including risk management, in order to assess the assumptions as applied to the
plan.



The Company employs a conservative investment
strategy whereby the majority of invested assets are held in appropriate
investments for defined benefit pension plans, including a small portion of plan
assets held in common stock of the Company.  The Company uses an independent
third party to administer its retirement plan.  At December 31, 2008, the assets
of the plan consisted of the trust account that is invested in a diversified
assortment of mutual fund investments having a combined fair market value of
$8,297,530 (approximately 91% of total plan assets) and 31,000 shares of Company
common stock with a fair value of $821,500 (approximately 9% of total plan
assets).  At December 31, 2007, the assets of the plan consisted of mutual fund
investments at a combined fair market value of $10,039,612 (approximately 92% of
total plan assets) and 31,000 shares of Company common stock with a fair value
of $860,250 (approximately 8% of total plan assets).  The Company's common stock
is stated at fair value based upon quoted bid prices on the last day of the plan
year.  Dividends paid in 2008 and 2007 to the plan on the Company common stock
totaled $11,780.  The plan made no purchases or sales of Company common stock
during 2008 or 2007.



The Company expects to contribute approximately
$972,000 to its pension plan in 2009.



The following benefit payments, which reflect
expected future service, are expected to be paid:



2009
			
			2010
			
			2011
			
			2012
			
			2013
			
			2014-2018Pension benefits
			$
			588,097
			$
			620,819
			$
			636,773
			$
			766,378
			$
			791,271
			$
			6,276,843




The Company also sponsors a 401(k) defined
contribution plan, which was amended on November 27, 2002 to adopt the
provisions of a 403(b) plan.  Employees have the option to invest in Company
stock or select mutual funds.  The Company matches 100% of employee
contributions invested in the Company's stock.  At December 31, 2008, the plan
held Company stock of 303,492 shares with a fair value of $8,042,542 and various
mutual funds with a total fair value of $177,403.  At December 31, 2007, the
plan held Company stock of 293,798 shares with a fair value of $8,152,890 and
various mutual funds with a total fair value of $165,294.  Matching
contributions to the plan expensed for 2008 and 2007 were $264,768 and $233,379,
respectively.  Dividends paid to the plan on Company stock were $112,289 and
$109,779 in 2008 and 2007, respectively.



NOTE G - Stockholders' Equity and Dividend
Restrictions

Statutory restrictions limit the amount of
dividends which may be paid by Investors Heritage Life.  Generally, dividends
during any year may not be paid, without prior regulatory approval, in excess of
the lesser of (a) 10 percent of statutory surplus as of the preceding December
31, or (b) statutory net gain from operations for the preceding year.  For 2009,
the maximum dividend that Investors Heritage Life can pay to Investors Heritage
Capital
without regulatory approval is $1,170,208.



The Company's 1999 stock option and stock
appreciation rights plan became effective as of September 16, 1999. The 1999
plan authorizes the Company's Board to grant non-qualified stock options and
stock appreciation rights to the Company's and its subsidiaries' key employees
and non-employee directors. The Company authorized for issuance a total of
250,000 shares of common stock under the 1999 plan and granted options to
purchase 75,000 shares of common stock at $23.00 per share, all of which vested
on September 24, 2001.  None of the options have been exercised as of December
31, 2008 and 61,125 options remain available for exercise as of that date.  No
options were forfeited during 2008 or 2007.  The Company reduced compensation
expense by $76,406 in 2008 and recognized compensation expense of $30,563 in
2007 relative to the outstanding options, based on changes in the market value
of the Company's stock compared to the exercise price of the options.



33



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE H - Statutory
Accounting Practices

Investors Heritage Life's statutory-basis capital
and surplus was $16,588,245 and $19,083,067 at December 31, 2008 and 2007,
respectively.  Statutory-basis net income (loss) was ($3,521,536) and $1,134,635
for 2008 and 2007, respectively.



Principal adjustments to statutory amounts to derive GAAP amounts include: a)
costs of acquiring new policies are deferred and amortized; b) benefit reserves
are calculated using more realistic investment, mortality and withdrawal
assumptions; c) changes in deferred taxes associated with timing differences are
recorded in net income rather than directly to equity; d) value of business
acquired and goodwill established for acquired companies differ from admitted
statutory goodwill; e) accounting for certain investments in debt securities is
at fair value with unrealized gains and losses reported as a separate component
of equity; and f) statutory asset valuation reserves and interest maintenance
reserves are eliminated.





NOTE I - Segment Data

SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires a "management approach" (how
management internally evaluates the operating performance of its business units)
in the presentation of business segments. The segment data that follows has been
prepared in accordance with SFAS No. 131.



The Company operates in four segments as shown in
the following table.  All segments include both individual and group insurance. 
Identifiable revenues, expenses and assets are assigned directly to the
applicable segment.  Net investment income and invested assets are generally
allocated to the insurance and the corporate segments in proportion to policy
liabilities and stockholders' equity, respectively.  Certain assets, such as
property and equipment and leased property under capital leases, are assigned to
the Corporate and other segment.  Realized gains and losses, including realized
losses as a result of other-than-temporary impairments, are allocated to the
Corporate and other segment.  Investors Heritage Financial revenue and income
associated with credit administrative services is assigned to that segment, with
any remaining revenue and income assigned to the Corporate and other segment. 
Results for the parent company, Investors Heritage Printing, At Need Funding and
Heritage Funding, after elimination of intercompany amounts, are allocated to
the Corporate and other segment.



2008
			
			2007(000's omitted)Revenue:Preneed and burial
			products
			$
			38,481
			$
			37,441Traditional and universal
			life products
			
			10,500
			
			11,685Credit insurance products
			and administrative services
			
			474
			
			435Corporate and other
			
			(2,871)
			
			1,350$
			46,584
			$
			50,911Pre-tax income (loss)
			from operations:Preneed and burial
			products
			$
			(366)
			$
			202Traditional and universal
			life products
			
			546
			
			893Credit insurance products
			and administrative services
			
			324
			
			298Corporate and other
			
			(3,420)
			
			602$
			(2,916)
			$
			1,995Assets:Preneed and burial
			products
			$
			275,161
			$
			273,585Traditional and universal
			life products
			
			71,097
			
			71,449Credit insurance products
			and administrative services
			
			13,588
			
			14,505Corporate and other
			
			50,731
			
			60,512$
			410,577
			$
			420,051Amortization and
			depreciation expense:Preneed and burial
			products
			$
			4,851
			$
			4,416Traditional and universal
			life products
			
			919
			
			1,343Credit insurance products
			and administrative services
			
			-
			
			-Corporate and other
			
			378
			
			417$
			6,148
			$
			6,176




34



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE J - Reinsurance

The Company ceded 100% of the risks associated with
its credit life and accident insurance written during 2008 and 2007 through
coinsurance agreements with various companies.  The Company administers the
ceded credit life and accident insurance for an agreed-upon fee.  During 2008
and 2007, the Company received $477,278 and $351,752, respectively, of fee
income associated with these reinsurance arrangements, which is recognized in
the credit insurance products and administrative services line of the preceding
table in Note I.  Ceded benefit and claim reserves associated with these
reinsurance arrangements at December 31, 2008 and 2007 were $12,861,295 and
$13,434,280, respectively.  Additionally, unearned premium reserves were reduced
by $12,147,435 and $12,982,282 at December 31, 2008 and 2007, respectively, for
credit-related reinsurance transactions.  The Company utilizes yearly renewable
term reinsurance to cede life insurance coverage in excess of its retention
limit, which is set at $25,000.



Investors Heritage Life cedes 85% of life and
annuity policy obligations assumed from Franklin American Life Insurance Company
to Scottish Annuity and Life Insurance Company (Cayman) Ltd.  Benefit reserves
ceded to Scottish and included in the amounts recoverable from reinsurers
approximated $27,598,000 and $29,253,000 at December 31, 2008 and 2007,
respectively. An escrow account has been established by Scottish to secure
Investors Heritage Life's ceded benefit obligations.



Reinsurance ceded and assumed amounts included in
the consolidated statements of income are as follows:



2008
			
			2007Premiums ceded
			$
			12,323,567
			$
			13,303,976Premiums assumed
			
			3,078,834
			
			3,561,983Commission and expense allowances
			
			4,819,632
			
			5,347,884Benefit recoveries
			
			8,850,357
			
			7,444,652




The Company remains contingently liable on all
ceded insurance should any reinsurer be unable to meet their obligations.



NOTE K - Contingent Liabilities

The Company is named as a defendant in several
legal actions arising primarily from claims made under insurance policies. 
Management and its legal counsel are of the opinion that the settlement of those
actions will not have a material adverse effect on the financial position or
results of operations.



In most of the states in which the Company is
licensed to do business, guaranty fund assessments may be taken as a credit
against premium taxes over a five-year period.  These assessments, brought about
by the insolvency of life and health insurers, are levied at the discretion of
the various state guaranty fund associations to cover association obligations. 
It is management's opinion that the effect of any future assessments would not
be material to the financial position or results of operations of the Company
because of the use of premium tax offsets.





NOTE L - Restatement of Financial Statements

We have restated our previously issued consolidated
financial statements as of and for the year ended December 31, 2008 (and comparative prior year) to account for the
impact of a clerical error in the calculation of insurance reserves on certain types of
life policies, principally certain reduced paid-up policies, extended term
policies and policy riders.  This error, which originated in 1998, has
resulted in understatements of Benefit reserves and related Amounts recoverable from reinsurers along with Deferred federal income tax
assets.  The Company has restated
retained earnings effective January 1, 2007, to reflect the recognition of the
prior period cumulative effect of the error, net of deferred income tax and
adjustments to reinsurance recoverable, reducing retained earnings by $626,847. 
The Company has recorded the effects of these changes in the 2008 and 2007
consolidated financial statements presented herein.  The Company has
also revised Notes A (reinsurance amounts), D (income taxes) and I (segment data) to
reflect these changes.



35



---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2008As Previously
			
			
			
			AsReported
			
			Adjustments
			
			RestatedSelected balance sheet
			data:Amounts recoverable from
			reinsurers
			
			$  49,523,594
			
			$      376,081
			
			$  49,899,675Benefit reserves
			
			342,065,366
			
			1,670,922
			
			343,736,288Deferred federal income
			tax liability
			
			1,292,352
			
			(440,246)
			
			852,106Retained earnings
			
			31,023,790
			
			(854,595)
			
			30,169,195For the year ended December 31, 2008As Previously
			
			
			
			AsReported
			
			Adjustments
			
			RestatedSelected statement of
			income data:Increase in benefit
			reservesand unearned premiums
			
			$    4,984,312
			
			$      159,294
			
			$    5,143,606Deferred federal income
			taxes (benefit)
			
			(1,598,829)
			
			(54,160)
			
			(1,652,989)Net
			loss
			
			(1,449,372)
			
			(105,134)
			
			(1,554,506)Basic and diluted netloss per share
			
			(1.30)
			
			(0.09)
			
			(1.39)Selected cash flow data:Net
			loss
			
			$  (1,449,372)
			
			$    (105,134)
			
			$   (1,554,506)Provision (benefit) for
			deferred federal income taxes
			
			(1,598,829)
			
			(54,160)
			
			(1,652,989)Amounts recoverable from
			reinsurers
			
			1,851,433
			
			(72,894)
			
			1,778,539Benefit reserves
			
			1,602,178
			
			232,188
			
			1,834,366December 31, 2007As Previously
			
			
			
			AsReported
			
			Adjustments
			
			RestatedSelected balance sheet
			data:Amounts recoverable from
			reinsurers
			
			$  51,375,027
			
			$      303,187
			
			$   51,678,214Benefit reserves
			
			341,268,264
			
			1,438,734
			
			342,706,998Deferred federal income
			tax liability
			
			5,211,301
			
			(386,086)
			
			4,825,215Retained earnings
			
			32,886,104
			
			(749,461)
			
			32,136,643For the year ended December 31, 2007As Previously
			
			
			
			AsReported
			
			Adjustments
			
			RestatedSelected statement of
			income data:Increase in benefit
			reservesand unearned premiums
			
			$    3,392,497
			
			$      185,779
			
			$     3,578,276Deferred federal income
			taxes
			
			242,421
			
			(63,165)
			
			179,256Net income
			
			1,662,960
			
			(122,614)
			
			1,540,346Basic and diluted net
			earningsper share
			
			1.49
			
			(0.11)
			
			1.38Selected cash flow data:Net income
			
			$    1,662,960
			
			$    (122,614)
			
			$     1,540,346Provision (benefit) for
			deferred federal income taxes
			
			242,421
			
			(63,165)
			
			179,256Amounts recoverable from
			reinsurers
			
			2,040,894
			
			(73,317)
			
			1,967,577Benefit reserves
			
			175,501
			
			259,096
			
			434,597






36



---









HARRY LEE
			WATERFIELD II
			Chairman of the Board
			President
			Chief Executive Officer
			Executive Committee
			Finance Committee
			Nominating Committee
			Frankfort, Kentucky  BOARD OF DIRECTORS  HAROLD G.
			DORAN, JR.
			Audit Committee
			Executive Committee
			Finance Committee
			Murray, Kentucky
			ROBERT M. HARDY, JR.
			Vice President, General Counsel
			Executive Committee
			Finance Committee
			Frankfort, KentuckyGORDON C. DUKE
			Audit Committee
			Finance Committee
			Frankfort, Kentucky
			DR. JERRY F. HOWELL, JR.
			Audit Committee
			Executive Committee
			Morehead, KentuckyMICHAEL F. DUDGEON, JR.
			Vice President, Financial Services
			Frankfort, Kentucky
			DAVID W.
			REED
			Audit Committee
			Nominating Committee
			Gilbertsville, KentuckyHOWARD L. GRAHAM
			Retired Vice President, Corporate
			Services
			Finance Committee
			Nominating Committee
			Frankfort, Kentucky
			HELEN S. WAGNER
			Executive Committee
			Nominating Committee
			Owensboro, Kentucky  CORPORATE OFFICERS  RAYMOND L. CARR
			Vice President, Chief Financial Officer
			Frankfort, Kentucky
			JANE S.
			JACKSON
			Corporate Secretary
			Frankfort, KentuckyJIMMY R. McIVER
			Treasurer
			Frankfort, Kentucky
			ERNST &
			YOUNG LLP
			Independent Registered
			Public Accounting Firm
			Cincinnati, Ohio  ANNUAL MEETING
			The 2009 meeting of shareholders of
			Investors Heritage Capital Corporation is scheduled for 11:00 a.m. on May 14, 2009 at the Company
			auditorium, Second and Shelby Streets, Frankfort, Kentucky.FORM 10-K
			A copy of the Form 10-K Annual Report to the
			Securities and Exchange Commission for the Company can be obtained
			at www.InvestorsHeritage.com or upon request to the Secretary.TRANSFER
			AGENT
			Investors Heritage Life Insurance Company
			Stock Transfer Department
			P.O. Box 717
			Frankfort, KY 40602-0717
			Phone: 800.422.2011  502.209.1009




37



---











2008
			INVESTORS
			
			HERITAGE CAPITAL
			
			CORPORATION
			
			200 CAPITAL AVENUEPOST OFFICE BOX 717FRANKFORT, KENTUCKY  40602




---

---