KENTUCKY

INVESTORS,

INC.      2007









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TABLE OF CONTENTS





2007 ANNUAL REVIEWKENTUCKY INVESTORS, INC.Board of Directors and Corporate
			Officers
			
			2Letter to our Stockholders
			
			3Management's Discussion and Analysis
			
			5Management's Report on Internal ControlOver Financial Reporting
			
			15Report of Independent Registered Public
			Accounting Firm
			
			16Consolidated Financial Statements
			
			17Notes to Consolidated Financial
			Statements
			
			21Annual Meeting
			
			39




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BOARD OF DIRECTORS

AND CORPORATE OFFICERS





Harry Lee Waterfield II
			e, f, n
			Chairman of the Board
			President and Chief Executive Officer
			Frankfort, KentuckyBOARD OF
			DIRECTORS
			CORPORATE OFFICERSHarold G. Doran, Jr.a, e, f
			Raymond L. CarrBoard of Directors
			Vice President, Chief Financial OfficerMurray, Kentucky
			Frankfort, KentuckyMichael F. Dudgeon, Jr.
			Jane S. JacksonBoard of Directors
			SecretaryFrankfort, Kentucky
			Frankfort, KentuckyGordon C. Dukea, f
			Jimmy R. McIverBoard of Directors
			TreasurerFrankfort, Kentucky
			Frankfort, KentuckyHoward L. Grahamf, nBoard of DirectorsRetired Vice President, Corporate
			ServicesFrankfort, KentuckyRobert M. Hardy, Jr.e, fBoard of Directors
			Ernst & Young LLPVice President, General Counsel
			Independent Registered PublicFrankfort, Kentucky
			Accounting FirmDr. Jerry F. Howell, Jr.a,
			eBoard of DirectorsMorehead, KentuckyDavid W. Reeda, nBoard of DirectorsGilbertsville, Kentuckya Audit CommitteeHelen S. Wagner e, n
			e Executive CommitteeBoard of Directors
			f Finance CommitteeOwensboro, Kentucky
			n Nominating Committee




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LETTER TO OUR STOCKHOLDERS





To
our stockholders,



Overall financial and organizational results were
very positive during 2007.  Although total consolidated revenue was down, net
income was up $429,000 over 2006 results.  Primarily responsible for our profits
of $1,662,960 were lower death claims due to writing better quality business,
continued success in controlling general expenses despite the continuing costs
of compliance with Sarbanes-Oxley, various outside audits and the increased cost
of health care.   Our expense control efforts have continued each year and I am
very proud of our management staff and all employees for successfully utilizing
our cost control guidelines.



Revenues were down primarily due to continued strong
competition in the preneed funeral insurance market and, in my opinion, the
state of the national economy late in the year.  From all indications, the bad
financial news which constantly and instantaneously confronts us has a direct
bearing on preneed insurance sales.  Additionally, in our financial services
division, loan demand weakened and bank lending requirements tightened due to
the economic situation of recent months.



During 2007 we developed a new preneed package named
Legacy Gold.  Under the direction of our Vice President and Chief Actuary, Julie
Hunsinger, this product was a collaborative effort of Home Office staff,
funeral directors, sales managers and outside consultants.  This included, among
other things, a thorough analysis of the market and our competition, as well as
our own substantial block of preneed insurance.



Legacy Gold was introduced in most of our
states of operation during the fourth quarter of 2007 and will be completely in
place by the end of the first quarter this year.  Response from our funeral
homes has been very positive to the various product features including policy
structure, death benefit growth, commissions and available riders.



In our bank market, sales were up slightly despite
lower sales during much of the last quarter of the year due to the economic
climate referred to earlier.  While we cannot know the length of the current
national economic situation, we will be working to improve penetration and
overall sales.  We are currently developing a new mortgage redemption
product that should help increase insurance sales on loans. This new product
should be available by mid- year.



Our joint venture with the Kentucky Bankers
Association continues to prove positive.  This year we are making changes to our
joint marketing programs and expect these changes, as well as the continued
marketing of other related fee income producing ancillary products, to help grow
this line of business.



For three years we have been providing, through
Investors Heritage Life Insurance Company, Third Party Administration (TPA)
services for several other companies.  In 2007, we lost a client due to its
acquisition, but we gained four new clients during the year.  Early last year we
organized a new Corporate Development department and hired an employee with a
background in banking and insurance to market our TPA services as well as find
blocks of life business or life companies to purchase.  We have done this
successfully in the past without a dedicated employee and feel that we can grow
this segment of our business with concentrated daily attention.  We are hopeful
this will become a strong part of our growth as a company and a solid profit
center.



Kentucky Investors, Inc. is the sole member of At
Need Funding, LLC.  At Need Funding offers assistance to funeral homes and the
families they serve by providing financing for funerals at the time of service. 
The financing is secured by the assignment of proceeds from an existing
incontestable life insurance policy from unaffiliated companies.  For the past
few years, the major use of this program has been from a group of nonaffiliated
funeral homes.  We plan to make At Need Funding a point of emphasis this year
and beyond with funeral homes writing Investors Heritage Life preneed
insurance.  This is a service that will save funeral directors time and improve
their cash flow making it an outstanding tool for our funeral home accounts. 
This service not only generates revenue for Kentucky Investors, but is also
another marketable program we can offer our affiliated funeral homes as well as
prospective accounts.



We continue to be pleased with the quality of our
invested assets.  Once again, at year end, 100% of our fixed income assets were
rated investment grade and no mortgage loans were in default.  Fixed maturities
represent 88.6% of our invested assets and are managed by Conning Asset
Management Company according to guidelines established by our Board of
Directors.  Our mortgage loan portfolio continues to perform well and enhances
our investment yield.  Approximately 99.8% of our mortgage loans are in
commercial properties and mortgage loans represent 7.6% of total invested
assets.  For a detailed report on our investments and overall financial
operation and results, please take time to read the Management's Discussion and
Analysis beginning on page 5.



For the coming year we anticipate improved sales
revenue as a result of our new products and other marketing and sales programs. 
However, the national economy and daily negative news seems to be having a
continued negative effect on consumer and borrower behavior.  How much this will
affect our projections is yet to be determined.  We will, however, continue to
encourage sales from existing accounts, try to bring new accounts to our
organization and improve fee and premium income through our Corporate
Development department and through other ancillary products and programs.



Our main goal continues to be the offering of
quality, profitable life insurance products enabling us to improve our financial
strength for the benefit of our various stakeholders.  I appreciate the
continued contributions to our success made by our sales associates, home office
staff and members of our Board of Directors.  Our solid, steady growth over the
past 45 years is a direct result of the efforts of many dedicated people, past
and present.





Respectfully submitted,









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MANAGEMENT'S DISCUSSION AND ANALYSIS





EXECUTIVE OVERVIEW



The
following discussion highlights significant factors impacting the consolidated
operating results and financial condition of Kentucky Investors, Inc. ("Kentucky
Investors") and its subsidiaries (collectively referred to as "we", "us", "our"
or the "Company") as of and for the year ended December 31, 2007, as compared
with the year ended December 31, 2006.  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.



Kentucky Investors is the parent company of Investors Heritage Life Insurance
Company, Investors Heritage Financial Services Group, Inc., Investors Heritage
Printing, Inc., and is the sole member of At Need Funding, LLC and Heritage
Funding, LLC.  Kentucky Investors and each subsidiary are domiciled in the
Commonwealth of Kentucky.  Approximately 99% of Kentucky Investors' 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 recently 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 entered into third party
administrative agreements with two insurance companies beginning in the first
quarter of 2007.  These agreements, for various levels of administrative
services on behalf of each company, generate fee income for Investors Heritage
Life.  This fee income offsets the loss of fee income from an administrative
agreement that ended in the first quarter of 2007 in conjunction with the sale
of a company for which Investors Heritage Life was providing services. 
Investors Heritage Life also entered into two other third party administrative
agreements during 2007 with start-up companies who have not yet begun insurance
operations.



During 2005, Investors Heritage Life finalized a
strategic agreement with the Kentucky Bankers Association (KBA), forming a new
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.



During 2005, Investors Heritage Life entered into a
reinsurance and administrative services arrangement with Covenant Life Insurance
Company, which is domiciled in the British Virgin Islands and is part of a group
that owns numerous cemeteries and funeral homes in several states.  A specific
preneed product was developed for Covenant, which Investors Heritage Life sold
and reinsured with Covenant.  Investors Heritage Life also provided
administrative services for Covenant, generating fee income.  This agreement was
terminated during the fourth quarter of 2006, and all policy risks were
recaptured by Investors Heritage Life along with all required reserves that were
previously held in trust.



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 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 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.



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.



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 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.



The Pension Protection Act of 2006 was passed by
legislators and signed by the President on August 17, 2006 to address the
funding mechanisms of pension plans. The Act alters the traditional formula
under which plan liabilities must be funded; however, the application of the new
formula to our plan remains in process.  Accordingly, the effect of this new law
on the funding of our pension plan has not yet been determined, but is expected
to be material.  In anticipation of an increase in required funding, we have
voluntarily increased the projected contribution to our pension plan for 2008 by
approximately $200,000 above our prior year contribution.



BUSINESS SEGMENTS



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.



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



OPERATING RESULTS



Consolidated Operations

Total consolidated revenues decreased approximately
$3,472,000 in 2007.  This decrease is primarily due to lower sales in the
preneed and burial segment in comparison to the prior year.  Our 2007 net income
increased approximately $429,000 compared with 2006.  The increase in net income
resulted from improved mortality in the preneed and traditional and universal
life segments coupled with lower expenses associated with the lower preneed
production previously mentioned.



Preneed & Burial Products

Revenues for the preneed and burial products
business segment decreased approximately $3,186,000, and pre-tax income
increased approximately $275,000 in 2007 compared to 2006.  The decrease in
revenue is primarily due to lower premium production in a competitive
marketplace and the Company's focus on maintaining profitable premium
production.  The increase in pre-tax income is the result of lower than expected
mortality within this line of business.  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 312007
			
			2006North Carolina
			$
			9,107,892
			$
			9,280,754Kentucky
			
			5,893,618
			
			5,419,089Tennessee
			
			1,910,156
			
			2,739,625Georgia
			
			1,336,172
			
			2,023,889Virginia
			
			1,246,302
			
			1,395,478Indiana
			
			737,529
			
			734,637South Carolina
			
			518,504
			
			571,672Ohio
			
			268,895
			
			387,862Florida
			
			228,904
			
			288,462Michigan
			
			198,533
			
			948,771All Other States
			
			507,821
			
			1,084,236TOTAL
			$
			21,954,326
			$
			24,874,475




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 is expected to fully replace the previous Legacy Protector
and Legacy Preferred 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.



Traditional & Universal Life Products

Revenues for 2007 decreased approximately $74,000. 
Revenues from this segment are primarily derived from bank sales of term
insurance products, for which demand fluctuates with economic conditions. 
Pre-tax income for 2007 increased approximately $417,000 due primarily to lower
than expected mortality within this line of business.



Investors Heritage Financial markets traditional
insurance products through banks and other financial institutions.  Currently,
Investors Heritage Financial services 292 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.  More recently, 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 significant 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 with Munich American Reassurance
Company and Scottish RE (U.S.) for amounts between $25,000 net amount at risk
and the previous retention of $100,000.



Credit Insurance & Administrative Services

We reinsure 100% of credit insurance underwriting
risk with Scottish RE (U.S.) and ACE Life Insurance Company, which replaced RBC
Reinsurance (Ireland) Ltd. as one of our reinsurers on new business effective
June 1, 2007.  In addition, Investors Heritage Life has a reinsurance
relationship with Kenbanc Reinsurance Company, Ltd., in conjunction with the KBA
partnership.  Each of these agreements generates marketing and initiation fees.



Along with the marketing and initiation fees
generated from the reinsurance agreements, this segment generates revenue
primarily from servicing and administering the credit business.  Because this
revenue is fee-based, its performance is in direct relation to new premium
production coupled with fees generated as premiums are earned.  Revenues for
this segment decreased approximately $72,000 in 2007 while pre-tax income
decreased approximately $91,000.  These decreases are directly related to lower
premium production within this segment during the current year.



Corporate & Other

Revenues from this segment in 2007 decreased
approximately $141,000 while pre-tax income increased $81,000.  The decrease in
revenues is due primarily to decreased funding activity within At Need Funding
coupled with a reduction in realized gains during the current year.  The
increase in pre-tax income in the current year is primarily due to lower general
expenses incurred in the current year, particularly relative to the Company's
pension plan and stock compensation expenses.



During 2007, Investors Heritage Financial's revenues
were approximately $522,000, up $179,000 compared to 2006, and dividends in the
aggregate amount of $454,000 were paid to Kentucky Investors.  Revenues from
Investors Heritage Printing were approximately $477,000 in 2007, up $37,000
compared to 2006.  Investors Heritage Printing did not pay any dividends to
Kentucky Investors.  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 $156,000 in 2007, down $117,000 compared to 2006, primarily due to
a decreased volume of current year lending activity as a result of the
acquisition of a key customer.  At Need Funding paid distributions of $40,000 to
Kentucky Investors in 2007.  Revenues from all non-Investors Heritage Life
sources constitute approximately 1% of total consolidated revenues in 2007 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 independent investment advisor and
portfolio manager, Conning Asset Management Company ("Conning"), we manage the
fixed income investment portfolio to achieve management'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.



Since inception, we have maintained a sound,
conservative investment strategy.  As of December 31, 2007, 88.6% of our total
invested assets are managed by Conning pursuant to specific investment
guidelines approved by the Board of Directors.  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, 2007 is AA.  At December 31, 2007 and
2006, the fixed income portfolio was allocated as follows:



December 312007
			
			2006Corporate:Bank & Finance
			20.3%
			
			20.8%Industrial & Miscellaneous
			20.8%
			
			19.9%Utilities
			6.4%
			
			6.4%Government
			13.6%
			
			12.6%Mortgage-backed securities
			20.5%
			
			21.6%Foreign
			7.7%
			
			8.2%Asset-backed securities
			4.6%
			
			4.3%States and Political Divisions
			6.1%
			
			6.2%




The fixed income portfolio includes approximately
$59,300,000 (at fair value) of mortgage-backed securities ("MBS").  MBS have
historically added value to the portfolio and Conning 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
$6,918,000, 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 23% of the
total MBS portfolio.  In accordance with Emerging Issues Task Force Issue 99-20,
"Recognition of Interest Income and Impairment of Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"), 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 is not 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 three sequential pay CMO's of
approximately $2,069,000, 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 under the provisions of EITF 99-20.



Pass-throughs comprise the remainder of MBS owned,
representing approximately 77% 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, 2007, we have only one CMO, with a value of
approximately $77,000, 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.



We also engage in commercial and residential
mortgage lending, with approximately 99.8% of these investments in commercial
properties.  All mortgage loans are originated in-house 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 $406,761 and the average loan to value is 40.0%.  The largest loan
currently held is $938,733.  We have approximately $24,812,000 invested in
mortgage loans, which represents 7.6% of total invested assets.  The portfolio
is diversified across various property types as follows:



December 312007
			
			2006Office
			23.4%
			
			20.4%Retail
			60.7%
			
			60.8%Industrial
			5.3%
			
			5.7%Medical
			3.4%
			
			3.5%Apartments
			5.5%
			
			6.1%Other
			1.7%
			
			3.5%




We are familiar with our mortgage loan markets and
are not aware of any negative factors or trends that would have a material
impact on the local economies where the mortgage loan properties are located.
 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 200 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, 2007 and 2006, 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.



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.  For 2007, our fixed income
investments were 100% investment grade as rated by Standard & Poor's. None of
our fixed income assets are in default.  Liquidity is also managed by laddering
maturities of our fixed income portfolio.  The average duration of our fixed
income investments is 4.5 years with approximately $11,414,000 due within 12
months and approximately $92,069,000 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, 2007, we renewed our $4,000,000
At Need Funding line of credit with interest paid monthly at a rate of 0.5%
under 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, 2007, the outstanding
principal balance on this line of credit was $568,002.



Effective June 30, 2007, we renewed our $150,000
Kentucky Investors line of credit with interest paid monthly at a rate of 1.2%
under the prime rate, renewable annually.  At December 31, 2007, 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, 2007, $808,757 remained outstanding on this
note.



On February 3, 2005, Kentucky Investors 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 Kentucky Investors.  Additionally, Kentucky
Investors used the proceeds to repay the $3,000,000 bank note outstanding at
December 31, 2004.  This transaction was approved by the Kentucky Office of
Insurance.  At December 31, 2007, $2,821,961 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.  At
December 31, 2007, $59,819 remained outstanding on this note.



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 and as of December 31, 2007, 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.



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 increased approximately $604,000 in 2007.  The increase in
statutory capital and surplus in 2007 is primarily related to the current year
net income offset by dividends paid.  Investors Heritage Life produced a
statutory operating gain of approximately $1,028,000 and $1,082,000 in 2007 and
2006, respectively.  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, 2007.



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.



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.



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, 2007. 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 has concluded
that the Company's internal control over financial reporting is effective at
December 31, 2007, and that there were no material weaknesses in the Company's
internal control over financial reporting as of that date.



---



REPORT OF INDEPENDENT REGISTERED 
PUBLIC ACCOUNTING FIRM





The Board of Directors and Stockholders

Kentucky Investors, Inc.



We have audited the accompanying consolidated
balance sheets of Kentucky Investors, Inc. (the Company) as of December 31, 2007
and 2006, 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 Kentucky Investors, Inc. at December 31, 2007 and 2006, 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 A to the consolidated financial
statements, in connection with implementing a new accounting standard, the
Company changed its method of accounting for certain employee benefit plans in
2006.











Cincinnati, Ohio

March 13, 2008



---



KENTUCKY INVESTORS, INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2007 AND 2006ASSETS
			
			2007
			
			2006Investments:Securities
			available-for-sale, at fair value:Fixed maturities
			(amortized cost: 2007 - $283,670,281; 
			         2006- $281,277,592)
			$
			289,516,851
			$
			284,005,322Equity securities
			(cost: 2007 - $3,850,263; 2006 - $3,141,053)
			
			4,335,063
			
			3,790,179Mortgage loans on real
			estate
			
			24,812,445
			
			24,629,380Policy loans
			
			6,968,157
			
			7,283,917Other long-term
			investments
			
			878,036
			
			1,438,921Short-term investments
			
			365,000
			
			390,000Total investments
			$
			326,875,552
			$
			321,537,719Cash and cash equivalents
			
			1,238,194
			
			1,776,491Accrued investment income
			
			4,668,922
			
			4,564,086Due premiums
			
			3,726,202
			
			3,854,233Deferred acquisition costs
			
			20,379,631
			
			21,494,408Present value of future
			profits
			
			116,385
			
			207,969Leased property under
			capital leases
			
			372,928
			
			350,093Property and equipment
			
			1,678,094
			
			1,666,402Collateral on securities
			loaned
			
			2,186,372
			
			-Cash value of
			company-owned life insurance
			
			6,845,039
			
			6,117,814Other assets
			
			285,532
			
			297,866Amounts recoverable from
			reinsurers
			
			51,375,027
			
			53,415,921$
			419,747,878
			$
			415,283,002LIABILITIES AND
			STOCKHOLDERS' EQUITYLIABILITIESPolicy liabilities:Benefit reserves
			$
			341,268,264
			$
			341,173,043Unearned premium
			reserves
			
			12,990,293
			
			13,525,803Policy claims
			
			1,476,669
			
			1,567,922Liability for
			deposit-type contracts
			
			2,663,641
			
			2,652,003Reserves for
			dividends and endowments and other
			
			547,262
			
			601,815Total policy
			liabilities
			$
			358,946,129
			$
			359,520,586Deferred federal income
			tax liability
			
			5,211,301
			
			3,784,625Obligations under
			capital leases
			
			371,736
			
			349,166Notes payable
			
			4,261,948
			
			5,725,751Obligations to return
			collateral under securities loan agreement
			
			2,186,372
			
			-Accrued pension
			liability
			
			2,159,914
			
			2,847,193Other liabilities
			
			2,053,378
			
			1,885,288Total liabilities
			$
			375,190,778
			$
			374,112,609STOCKHOLDERS' EQUITYCommon stock (shares
			issued:  2007-1,117,851; 2006-1,113,104)
			$
			1,117,851
			$
			1,113,104Paid-in surplus
			
			8,650,907
			
			8,603,902Accumulated other
			comprehensive income (loss)
			
			1,902,238
			
			(114,520)Retained earnings
			
			32,886,104
			
			31,567,907Total stockholders'
			equity
			$
			44,557,100
			$
			41,170,393$
			419,747,878
			$
			415,283,002See notes to consolidated financial statements.




---



KENTUCKY INVESTORS, INC.CONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 2007 AND 20062007
			
			2006REVENUEPremiums and other
			considerations
			$
			44,918,530
			$
			47,787,186Premiums ceded
			
			(13,303,976)
			
			(12,817,430)Net premiums earned
			
			31,614,554
			
			34,969,756Investment income, net of
			expenses
			
			18,051,636
			
			18,083,536Realized gains on
			investments, net
			
			136,160
			
			257,312Other income
			
			1,108,904
			
			1,073,066Total revenue
			$
			50,911,254
			$
			54,383,670BENEFITS AND EXPENSESDeath and other benefits
			$
			31,674,160
			$
			31,501,960Guaranteed annual
			endowments
			
			559,174
			
			584,007Dividends to
			policyholders
			
			538,936
			
			558,204Increase in benefit
			reserves and unearned premiums
			
			3,392,497
			
			6,780,867Acquisition costs
			deferred
			
			(4,776,602)
			
			(5,005,274)Amortization of deferred
			acquisition costs
			
			5,667,548
			
			6,177,347Commissions
			
			2,064,650
			
			2,423,522Other insurance expenses
			
			9,610,382
			
			9,863,970Total benefits and
			expenses
			$
			48,730,745
			$
			52,884,603INCOME BEFORE FEDERAL
			INCOME TAXES
			$
			2,180,509
			$
			1,499,067PROVISION (BENEFIT) FOR
			FEDERAL INCOME TAXESCurrent
			$
			275,128
			$
			288,807Deferred
			
			242,421
			
			(23,294)$
			517,549
			$
			265,513NET INCOME
			$
			1,662,960
			$
			1,233,554BASIC AND DILUTED NET
			EARNINGS PER SHARE
			$
			1.49
			$
			1.11See notes to consolidated financial statements.




---



KENTUCKY INVESTORS, INC.CONSOLIDATED STATEMENTS OF
			STOCKHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2007
			AND 2006AccumulatedOther
			
			
			
			TotalCommon
			
			Paid-in
			
			Comprehensive
			
			Retained
			
			Stockholders'Stock
			
			Surplus
			
			Income (Loss)
			
			Earnings
			
			EquityBALANCE, JANUARY
			1, 2006
			$
			1,104,773
			$
			8,578,978
			$
			3,954,841
			$
			30,624,112
			$
			44,262,704Comprehensive
			income (loss):Net income
			
			-
			
			-
			
			-
			
			1,233,554
			
			1,233,554Change in net
			unrealized appreciationon
			available-for-sale securities
			
			-
			
			-
			
			(2,947,301)
			
			-
			
			(2,947,301)Change in
			additional minimum pension liability
			
			-
			
			-
			
			(12,580)
			
			-
			
			(12,580)Change in fair
			value of hedging instrument
			
			-
			
			-
			
			1,011
			
			-
			
			1,011Total
			comprehensive loss
			
			
			
			
			
			
			
			
			
			(1,725,316)Adjustment to adopt
			new accounting standardfor employee
			benefit plans
			
			-
			
			-
			
			(1,110,491)
			
			-
			
			(1,110,491)Cash dividends
			
			-
			
			-
			
			-
			
			(455,604)
			
			(455,604)Issuances of common
			stock, net
			
			8,331
			
			24,924
			
			-
			
			165,845
			
			199,100BALANCE,
			DECEMBER 31, 2006
			$
			1,113,104
			$
			8,603,902
			$
			(114,520)
			$
			31,567,907
			$
			41,170,393Comprehensive
			income (loss):Net income
			
			-
			
			-
			
			-
			
			1,662,960
			
			1,662,960Change 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
			
			
			
			
			
			
			
			
			
			3,679,718Cash 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
			$
			32,886,104
			$
			44,557,100See notes to consolidated financial
			statements.




---



KENTUCKY INVESTORS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2007 AND 20062007
			
			2006OPERATING ACTIVITIESNet income
			$
			1,662,960
			$
			1,233,554Adjustments to reconcile net
			incometo net cash provided by
			operating activities:Realized gains on
			investments, net
			
			(136,160)
			
			(257,312)Provision (benefit) for
			deferred federal income taxes
			
			242,421
			
			(23,294)Amortization of deferred
			acquisition costs
			
			5,667,548
			
			6,177,347Acquisition costs
			deferred
			
			(4,776,602)
			
			(5,005,274)Net adjustment for
			premium and discount on investments
			
			390,810
			
			374,038Depreciation and other
			amortization
			
			508,847
			
			467,984Changes in operating
			assets and liabilities:Accrued investment
			income
			
			(104,836)
			
			90,676Due premiums
			
			128,031
			
			235,394Cash value of
			company-owned life insurance
			
			(727,225)
			
			60,322Amounts recoverable
			from reinsurers
			
			2,040,894
			
			1,483,475Benefit reserves
			
			175,501
			
			3,580,588Policy claims
			
			(91,253)
			
			(128,508)Liability for
			deposit-type contracts
			
			11,638
			
			38,499Reserves for dividends
			and endowments and other
			
			(54,553)
			
			(28,054)Other assets and other
			liabilities
			
			(13,952)
			
			(205,056)NET CASH PROVIDED BY
			OPERATING ACTIVITIES
			$
			4,924,069
			$
			8,094,379INVESTING ACTIVITIESSecurities
			available-for-sale:Purchases
			$
			(17,865,881)
			$
			(46,138,747)Sales and maturities
			
			14,509,329
			
			40,247,574Other investments:Cost of acquisitions
			
			(3,339,983)
			
			(4,394,097)Sales and maturities
			
			4,058,563
			
			3,827,689Net additions to property
			and equipment
			
			(451,790)
			
			(416,673)NET CASH USED IN
			INVESTING ACTIVITIES
			$
			(3,089,762)
			$
			(6,874,254)FINANCING ACTIVITIESReceipts from universal
			life policies credited topolicyholder account
			balances
			$
			9,543,732
			$
			10,351,773Return of policyholder
			account balances on universal life policies
			
			(10,159,522)
			
			(10,043,276)Payments on notes payable
			
			(4,922,045)
			
			(8,210,899)Proceeds from notes
			payable
			
			3,458,242
			
			6,721,240Issuances of common stock,
			net
			
			130,051
			
			199,100Dividends
			
			(423,062)
			
			(455,604)NET CASH USED IN
			FINANCING ACTIVITIES
			$
			(2,372,604)
			$
			(1,437,666)DECREASE IN CASH AND CASH
			EQUIVALENTS
			$
			(538,297)
			$
			(217,541)Cash and cash equivalents
			at beginning of year
			
			1,776,491
			
			1,994,032CASH AND CASH EQUIVALENTS
			AT END OF YEAR
			$
			1,238,194
			$
			1,776,491See notes to consolidated financial statements.




---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - Nature of Operations and Accounting
Policies



Kentucky Investors, Inc. ("Kentucky Investors") 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 Kentucky Investors 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:  The accompanying
consolidated financial statements of Kentucky Investors 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 Kentucky Investors, 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.



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 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.



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 $666,276 and $574,692 at December 31, 2007 and
2006, respectively.  Annual amortization for 2008, 2009 and 2010 will be
approximately $86,100, $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 $3,431,610 and $3,777,435 at December 31, 2007 and 2006, respectively.



Capital Leases: During 2007, the Company
entered into five capital leases for office equipment. Total lease payments for
2007 and 2006 relating to new and previously existing capital leases were
$273,717 and $242,858, respectively. Future minimum lease payments for 2008,
2009, 2010 and 2011 are $201,036, $147,232, $111,989, and $17,122,
respectively.  The present value of net minimum lease payments at December 31,
2007 was $371,736, which is equal to the total future minimum lease payments of
$477,379 less imputed interest of $105,643. Accumulated amortization on the
leased property was $589,602 and $429,001 at December 31, 2007 and 2006,
respectively.



Collateral on Securities Loaned: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 as 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.



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,
2007 and 2006, amounts recoverable from reinsurers were $51,375,027 and
$53,415,921, respectively.  These amounts included reserves ceded to reinsurers
of $50,473,220 and $52,283,087 at December 31, 2007 and 2006, 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 5.40% 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.



Deferred acquisition costs related to universal life
and investment-type products are amortized as a uniform percentage of each
year's expected gross profits, over the life of the policies.  Amortization is
unlocked for significant changes in expected versus actual gross profits,
including the effects of realized gains or losses on fixed income securities.



Stock Option and Stock Appreciation Rights Plan:Effective January 1, 2006, we began accounting for 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
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. Prior to the adoption of SFAS No. 123(R) on January
1, 2006, the Company also accounted for stock-based compensation in accordance
with SFAS No. 123, under which compensation expense is recognized based on the
intrinsic value of stock-based compensation. Implementation of this new standard
did not have a material impact on the Company's financial condition or
operations based on the current use of the liability method.



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 2007 and 2006 were 1,113,412 and 1,107,768 shares, respectively.  Cash
dividends per share were $.38 in 2007 and 2006.



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, 2007 and 2006 are summarized as follows:



2007
			
			2006Net unrealized gain (loss) arising during period
			$
			1,845,950
			$
			(2,689,989)Reclassification adjustment for net gainsincluded in net income
			
			(136,160)
			
			(257,312)Net unrealized loss on available-for-sale
			securities
			$
			1,709,790
			$
			(2,947,301)




New Accounting Standards:On September 29,
2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans,"
which amends SFAS No. 87, "Employers' Accounting for Pensions," SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No.
132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," and applies to all plan sponsors who offer defined
benefit pension and postretirement benefit plans. SFAS No. 158 requires an
entity to recognize an asset for a plan's overfunded status or a liability for a
plan's underfunded status measured as of the end of the entity's fiscal year
effective for fiscal years ending after December 15, 2006 (December 31, 2006 for
the Company).  The entity will recognize changes in the funded status in other
comprehensive income (loss) in the year in which the changes occur.  The
adoption of this Statement resulted in an additional charge, net of applicable
deferred income taxes, to accumulated other comprehensive income (loss) at
December 31, 2006 of $1,110,491, representing the difference between the
projected benefit obligation measurement on which SFAS No. 158 reporting is
based and the accumulated benefit obligation measurement on which reporting was
based prior to the adoption of SFAS No. 158.



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 will
adopt SFAS No. 157 and FAS 157-2 effective January 1, 2008.  The adoption of
these standards is not expected to have a material effect on the Company's
results of operations, financial position or liquidity.



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.



SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 (January 1, 2008 for the Company).  Upon adoption, an
entity is 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 is not expected to have an
impact on the Company's results of operations, financial position or liquidity.



On September 15, 2005, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 05-1, "Accounting
by Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts."  AcSEC defines an
internal replacement as a modification in product benefits, features, rights, or
coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract.  An internal replacement that is determined to
result in a replacement contract that is substantially unchanged from the
replaced contract should be accounted for as a continuation of the replaced
contract.  Contract modifications resulting in a replacement contract that is
substantially changed from the replaced contract should be accounted for as an
extinguishment of the replaced contract and any unamortized deferred policy
acquisition costs, unearned revenue liabilities, and deferred sales inducement
costs from the replaced contract should be written off and acquisition costs of
the new contract capitalized as appropriate.  This SOP was effective for
internal replacements occurring in fiscal years beginning after December 15,
2006 (January 1, 2007 for the Company).  The adoption of this guidance did not
have a material impact on the Company's consolidated financial statements.



The FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109" ("FIN 48"), in June 2006.  FIN 48 clarifies the accounting for
uncertainty in income taxes by defining criteria that a tax position on an
individual matter must meet before that position is recognized in the financial
statements.  Additionally, FIN 48 provides guidance on measurement,
derecognition, classification, interest and penalties, interim period
accounting, disclosures and transition.  We adopted the provisions of FIN 48 on
January 1, 2007.  The adoption of FIN 48 did not have a material impact on our
financial condition or results of operations, and the Company does not have a
recorded liability for uncertain tax benefits.



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
$7,944,000 and $6,473,000 of the loans outstanding at December 31, 2007 were to
borrowers located in Kentucky and Florida, respectively.  All loans are secured
by a first mortgage on the property.



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



Gross
			
			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
			
			148,700,917
			
			4,251,222
			
			204,850
			
			2,156,377
			
			150,590,912Foreign
			
			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
			$
			283,670,281
			$
			8,828,848
			$
			321,789
			$
			2,660,489
			$
			289,516,851Equity securities
			
			3,850,263
			
			684,202
			
			199,402
			
			-
			
			4,335,063Total
			$
			287,520,544
			$
			9,513,050
			$
			521,191
			$
			2,660,489
			$
			293,851,914Gross
			
			Gross Unrealized Losses2006
			
			Amortized
			
			Unrealized
			
			Less Than
			
			Greater Than
			
			FairCost
			
			Gains
			
			12 Months
			
			12 Months
			
			ValueAvailable-for-sale
			securities:U.S. government obligations
			$
			35,414,215
			$
			567,834
			$
			108,516
			$
			143,681
			$
			35,729,852States and political
			subdivisions
			
			17,357,360
			
			400,379
			
			26,248
			
			178,699
			
			17,552,792Corporate
			
			144,745,347
			
			3,633,555
			
			195,031
			
			1,961,064
			
			146,222,807Foreign
			
			21,884,041
			
			1,436,789
			
			-
			
			134,868
			
			23,185,962Mortgage-backed securities
			
			61,876,629
			
			290,374
			
			40,885
			
			812,209
			
			61,313,909Total fixed maturity
			securities
			$
			281,277,592
			$
			6,328,931
			$
			370,680
			$
			3,230,521
			$
			284,005,322Equity securities
			
			3,141,053
			
			745,090
			
			95,964
			
			-
			
			3,790,179Total
			$
			284,418,645
			$
			7,074,021
			$
			466,644
			$
			3,230,521
			$
			287,795,501




The following table summarizes, for all securities
in an unrealized loss position at December 31, 2007 and 2006, 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, 2007
			
			
			December 31, 2006Gross
			
			
			
			
			
			
			GrossEstimated
			
			Unrealized
			
			Number Of
			
			
			Estimated
			
			Unrealized
			
			Number OfFair Value
			
			Loss
			
			Securities
			
			
			Fair Value
			
			Loss
			
			SecuritiesFixed Maturities:Fewer Than 6 Months
			$
			10,785,483
			$
			120,084
			
			10
			
			$
			22,774,799
			$
			208,481
			
			157-12 Months
			
			9,945,930
			
			201,705
			
			6
			
			
			12,179,917
			
			162,199
			
			12Greater Than 12 Months
			
			70,596,887
			
			2,660,489
			
			102
			
			
			88,841,641
			
			3,230,521
			
			117Total Fixed Maturities
			
			91,328,300
			
			2,982,278
			
			118
			
			
			123,796,357
			
			3,601,201
			
			144Equities:Fewer Than 6 Months
			
			1,604,658
			
			199,402
			
			2
			
			
			1,547,975
			
			95,964
			
			27-12 Months
			
			-
			
			-
			
			-
			
			
			-
			
			-
			
			-Greater Than 12 Months
			
			-
			
			-
			
			-
			
			
			-
			
			-
			
			-Total Equities
			
			1,604,658
			
			199,402
			
			2
			
			
			1,547,975
			
			95,964
			
			2Total
			$
			92,932,958
			$
			3,181,680
			
			120
			
			$
			125,344,332
			$
			3,697,165
			
			146




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%.   As of December 31, 2006, all of the above fixed maturity securities had a
fair value to cost ratio equal to or greater than 91% and the equity securities
noted above had a fair value to cost ratio of over 92%.



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.



Based on an analysis of the criteria previously
discussed, none of the securities, including securities with unrealized losses
greater than 12 months in age, are believed to be other-than-temporarily
impaired at December 31, 2007.  Management believes that the Company will fully
recover its cost basis in the securities held at December 31, 2007, and has the
ability and intent to hold such securities until they recover or mature.  The
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 or 2006.



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 312007
			
			
			2006Net unrealized appreciation onavailable-for sale securities
			$
			6,331,370
			
			
			3,376,856Adjustment to deferred acquisition costs
			
			(488,471)
			
			
			(264,635)Deferred income taxes
			
			(2,424,467)
			
			
			(1,403,579)Net unrealized appreciation onavailable-for sale securities
			$
			3,418,432
			
			
			1,708,642




The
amortized cost and fair value of debt securities at December 31, 2007, 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
			$
			11,312,390
			
			$
			11,413,852Due after one year through five years
			
			88,402,789
			
			
			92,069,408Due after five years through ten years
			
			90,640,533
			
			
			91,377,207Due after ten years
			
			34,139,852
			
			
			35,403,593Due at multiple maturity dates
			
			59,174,717
			
			
			59,252,791Total
			$
			283,670,281
			
			$
			289,516,851




Proceeds during 2007 and 2006 from sales and
maturities of investments in available-for-sale securities were $14,509,329 and
$40,247,574, respectively.  Gross gains of $140,149 and $493,396 and gross
losses of $3,989 and $217,000 were realized on those sales during 2007 and 2006,
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, 2007 and 2006.



2007
			
			
			2006Change in unrealized investment gains
			(losses):Available-for-sale:Fixed maturities
			$
			3,118,840
			
			$
			(4,862,327)Equity securities
			
			(164,326)
			
			
			128,671Realized investment gains (losses):Available-for-sale:Fixed maturities
			$
			16,894
			
			$
			54,868Equity securities
			
			119,266
			
			
			221,528




Major categories of net investment income are
summarized as follows:



2007
			
			
			2006Fixed maturities
			$
			16,110,351
			
			$
			16,027,253Mortgage loans on real estate
			
			1,830,213
			
			
			1,682,625Other
			
			948,560
			
			
			1,226,288$
			18,889,124
			
			$
			18,936,166Investment expenses
			
			837,488
			
			
			852,630$
			18,051,636
			
			$
			18,083,536




The Company is required to hold assets on deposit
for the benefit of policyholders in accordance with statutory rules and
regulations.  At December 31, 2007 and 2006, these required deposits had a total
amortized cost of $22,916,096 and $23,025,065, 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.  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.  At December 31, 2006, there were no securities on loan under this
agreement.  Income earned relative to this program was $26,705 and $21,228 for
the years ended December 31, 2007 and 2006, 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 $808,757. 
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, 2007 and 2006, 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 $1,603 and $16,476 at
December 31, 2007 and 2006, respectively.  There was a charge to other
comprehensive income of $10,157 for the year ended December 31, 2007 and a
credit to other comprehensive loss of $1,011 for the year ended December 31,
2006, associated with the change in the market value of the interest rate cap. 
Income earned relative to the cap totaled $5,671 and $5,990 during 2007 and
2006, respectively.



NOTE C - Fair Values of Financial Instruments



The following disclosure of the estimated fair
values of financial instruments, as of December 31, 2007 and 2006, 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.



2007
			
			2006Carrying
			
			Fair
			
			Carrying
			
			FairAmount
			
			Value
			
			Amount
			
			ValueAssets:Fixed maturities
			$
			289,516,851
			$
			289,516,851
			$
			284,005,322
			$
			284,005,322Equity securities
			
			4,335,063
			
			4,335,063
			
			3,790,179
			
			3,790,179Mortgage loans on real
			estate:Commercial
			
			24,771,936
			
			24,974,970
			
			23,267,266
			
			23,945,158Residential
			
			40,509
			
			41,885
			
			939,976
			
			935,930Farm
			
			-
			
			-
			
			422,138
			
			429,641Policy loans
			
			6,968,157
			
			6,968,157
			
			7,283,917
			
			7,283,917Other long-term
			investments
			
			878,036
			
			878,036
			
			1,438,921
			
			1,438,921Short-term investments
			
			365,000
			
			365,000
			
			390,000
			
			390,000Cash and cash equivalents
			
			1,238,194
			
			1,238,194
			
			1,776,491
			
			1,776,491Accrued investment income
			
			4,668,922
			
			4,668,922
			
			4,564,086
			
			4,564,086Collateral on securities
			loaned
			
			2,186,372
			
			2,186,372
			
			-
			
			-Cash value of
			company-ownedlife insurance
			
			6,845,039
			
			6,845,039
			
			6,117,814
			
			6,117,814Liabilities:Policyholder deposits(Investment-type
			contracts)
			$
			87,039,472
			$
			83,936,326
			$
			86,505,188
			$
			83,299,331Policy claims
			
			1,476,669
			
			1,476,669
			
			1,567,922
			
			1,567,922Obligations under capital
			leases
			
			371,736
			
			371,736
			
			349,166
			
			349,166Notes payable
			
			4,261,948
			
			4,161,631
			
			5,725,751
			
			5,544,831




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 quoted market prices.



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:  The fair values
for the liabilities under investment-type insurance contracts are calculated as
surrender values on these contracts.



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 are estimated using discounted cash flow analyses, using current
interest rate assumptions.



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



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:



2007
			
			2006Deferred tax liabilities:Policy acquisition costs
			$
			4,698,453
			$
			4,955,121Net unrealized gain on available-for-sale
			securities
			
			2,424,467
			
			1,403,579Due premiums
			
			1,309,280
			
			1,376,445Other
			
			1,225,426
			
			1,177,374Total deferred tax liabilities
			$
			9,657,626
			$
			8,912,519Deferred tax assets:Benefit reserves
			$
			1,335,875
			$
			1,574,579Remaining 807(f) reserve adjustment
			
			589,640
			
			737,049Other policyholder funds
			
			300,162
			
			332,582AMT credit carry forwards
			
			422,786
			
			423,682Accrued pension liability
			
			734,371
			
			968,046Other
			
			1,063,491
			
			1,091,956Total deferred tax assets
			$
			4,446,325
			$
			5,127,894Net deferred tax liabilities
			$
			5,211,301
			$
			3,784,625




The Company periodically reviews its gross deferred
tax assets for recoverability.  At December 31, 2007 and 2006, 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:



2007
			
			
			2006Statutory federal income tax rate
			34.0
			%
			
			34.0
			%Small life insurance company deduction
			(4.2)
			%
			
			(17.9)
			%Dividends-received deduction
			(2.0)
			%
			
			(2.8)
			%Defined contribution plan dividend
			(1.7)
			%
			
			(2.4)
			%Nondeductible COLI expense
			0.6
			%
			
			6.9
			%Other
			(3.0)
			%
			
			(0.1)
			%Effective income tax rate
			23.7
			%
			
			17.7
			%




At January 1, 2006, $689,535 of the retained
earnings of the Company represented earnings prior to 1984 that accumulated in
an account known as policyholders' surplus, which was not subject to income
taxation.  The American Jobs Creation Act of 2004 eliminated the tax associated
with distributions from this policyholders' surplus account made during
specified tax years.  Under the American Jobs Creation Act of 2004, any
distributions to shareholders made during the 2005 and 2006 tax years are
treated as being made first out of policyholders' surplus.  Accordingly,
Investors Heritage Life paid a dividend in the amount of $728,768 to Kentucky
Investors in 2006.  As a result of this dividend, the balance of this
policyholders' surplus account has been eliminated.



We file U.S. federal income tax returns and income
tax returns in various state jurisdictions. Our 2004, 2005 and 2006 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 $331,693 and
$332,113 in 2007 and 2006, respectively.



NOTE E - Notes Payable



Effective June 30, 2007, the Company renewed its At
Need Funding line of credit and the Kentucky Investors line of credit.  The At
Need Funding line of credit is in the amount of $4,000,000 with interest to be
paid monthly at a rate of 0.5% under 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 Kentucky Investors line of credit is in
the amount of $150,000 with interest to be paid monthly at a rate of 1.2% under
the prime rate, renewable annually.  This line of credit is for general
corporate purposes.



On June 1, 2005, Kentucky Investors 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, Kentucky
Investors 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, Kentucky Investors 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 Kentucky Investors.  Additionally, Kentucky
Investors used such proceeds to repay the $3,000,000 bank note outstanding at
December 31, 2004.  This transaction was approved by the Kentucky Office 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.



Information relative to the Company's notes payable at December 31, 2007 and
2006 is as follows:



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
			
			-
			
			-2006Outstanding
			
			Current
			
			Maturity
			
			Interest
			
			InterestPrincipal
			
			Interest Rate
			
			Date
			
			Expense
			
			PaidMortgage note
			$
			3,136,422
			
			5.05%
			
			3/1/2015
			$
			165,373
			$
			166,631At Need Funding line of
			credit
			
			1,159,684
			
			7.75%
			
			6/30/2007
			
			101,351
			
			98,347Bank note
			
			1,132,757
			
			7.25%
			
			6/2/2010
			
			90,134
			
			90,771Promissory note - related
			party
			
			286,710
			
			4.00%
			
			12/31/2008
			
			15,608
			
			17,639Auto loan
			
			10,178
			
			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.



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



2007
			
			2006Change in projected
			benefit obligation:Benefit obligation at
			beginning of year
			$
			12,944,476
			$
			11,541,756Service cost
			
			364,197
			
			310,753Interest cost
			
			741,905
			
			695,789Actuarial (gain) loss
			
			(642,126)
			
			655,153Benefits paid
			
			(348,676)
			
			(258,975)Benefit obligation at end
			of year
			$
			13,059,776
			$
			12,944,476Change in plan assets:Fair value of plan assets
			at beginning of year
			$
			10,097,283
			$
			8,610,320Actual return on plan
			assets
			
			498,335
			
			1,093,018Employer contribution
			
			652,920
			
			652,920Benefits paid
			
			(348,676)
			
			(258,975)Fair value of plan assets
			at end of year
			$
			10,899,862
			$
			10,097,283Funded status
			$
			(2,159,914)
			$
			(2,847,193)Unrecognized net actuarial
			loss
			
			-
			
			2,762,321Additional minimum pension
			liability
			
			-
			
			(1,079,760)Adjustment to adopt new
			accounting standardfor employee benefit
			plans
			
			-
			
			(1,682,561)Accrued pension liability
			$
			(2,159,914)
			$
			(2,847,193)Components of net
			periodic benefit cost:Service cost
			$
			364,197
			$
			310,753Interest cost
			
			741,905
			
			695,789Expected return on plan
			assets
			
			(863,037)
			
			(728,793)Recognized actuarial net
			loss
			
			203,068
			
			216,801Net periodic benefit cost
			$
			446,133
			$
			494,550Accumulated benefit
			obligation
			$
			11,474,234
			$
			11,261,915




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.  The portion
of the accrued pension liability included in accumulated other comprehensive
loss at December 31, 2006 is $2,762,321, which has been recorded net of related
tax of $939,188.  These amounts are solely the result of unamortized actuarial
net losses not yet amortized into income.



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



2007Net gain
			$
			277,424Amortization of actuarial
			net loss
			
			203,068480,492Deferred federal income tax
			
			(163,367)Total recognized in other
			comprehensive income
			$
			317,125




The estimated net loss that will be amortized from
accumulated other comprehensive income into net periodic benefit cost during
2008 is $122,594.



Weighted-average actuarial assumptions used at
December 31, 2007 and 2006 to determine benefit obligations and net periodic
benefit cost are as follows:



December 312007
			
			2006Discount Rate
			6.25%
			
			5.75%Expected return on plan
			assets
			8.30%
			
			8.60%Rate of compensation
			increases
			4.00%
			
			4.00%




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, 2007, 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
$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).  At December 31, 2006, the assets of the plan consisted of mutual
fund investments at a combined fair market value of $9,252,533 (approximately
92% of total plan assets) and 31,000 shares of Company common stock with a fair
value of $844,750 (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 2007 and 2006 to the plan on the Company
common stock totaled $11,780.  The plan made no purchases or sales of Company
common stock during 2007 or 2006.



The Company expects to contribute approximately
$852,920 to its pension plan in 2008.



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



2008
			
			2009
			
			2010
			
			2011
			
			2012
			
			2013-2017Pension Benefits
			$
			598,066
			$
			599,516
			$
			630,772
			$
			646,217
			$
			760,386
			$
			5,448,571




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, 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.  At December 31, 2006, the
plan held Company stock of 287,884 shares with a fair value of $7,844,827 and
various mutual funds with a total fair value of $59,805.  Matching contributions
to the plan expensed for 2007 and 2006 were $233,379 and $213,158,
respectively.  Dividends paid to the plan on Company stock were $109,779 and
$105,014 in 2007 and 2006, 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 2008, the
maximum dividend that Investors Heritage Life can pay to Kentucky Investors
without regulatory approval is $1,028,104.



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, 2007 and 61,125 options remain available for exercise as of that date.  No
options were forfeited during 2007 or 2006.  The Company recognized compensation
expense of $30,563 and $229,218 in 2007 and 2006, respectively, 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.



NOTE H - Statutory Accounting Practices



Investors Heritage Life's statutory-basis capital
and surplus was $19,083,067 and $18,479,108 at December 31, 2007 and 2006,
respectively.  Statutory-basis net income was $1,134,635 and $1,300,773 for 2007
and 2006, 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 segment.  Results for the parent company, Investors Heritage
Printing, Investors Heritage Financial, At Need Funding, and Heritage Funding,
after elimination of intercompany amounts, are allocated to the Corporate
segment.



During the current year, we determined that certain
service fee income of Investors Heritage Financial that is derived from external
parties relative to credit administrative services being provided should be
included within the Credit Insurance Products and Administrative Services
segment.  Historically, all Investors Heritage Financial revenue and income has
been included in the Corporate and Other segment.  Accordingly, the prior year
segment data has been reclassified for comparative purposes with the current
year segment presentation.



2007
			
			2006(000's omitted)Revenue:Preneed and burial
			products
			$
			37,441
			$
			40,627Traditional and universal
			life products
			
			11,685
			
			11,759Credit insurance products
			and administrative services
			
			435
			
			507Corporate and other
			
			1,350
			
			1,491$
			50,911
			$
			54,384Pre-tax income from
			operations:Preneed and burial
			products
			$
			388
			$
			113Traditional and universal
			life products
			
			893
			
			476Credit insurance products
			and administrative services
			
			298
			
			389Corporate and other
			
			602
			
			521$
			2,181
			$
			1,499Assets:Preneed and burial
			products
			$
			271,843
			$
			268,486Traditional and universal
			life products
			
			71,752
			
			74,918Credit insurance products
			and administrative services
			
			14,505
			
			15,179Corporate and other
			
			61,648
			
			56,700$
			419,748
			$
			415,283Amortization and
			depreciation expense:Preneed and burial
			products
			$
			4,416
			$
			4,565Traditional and universal
			life products
			
			1,343
			
			1,702Credit insurance products
			and administrative services
			
			-
			
			2Corporate and other
			
			417
			
			376$
			6,176
			$
			6,645




NOTE J - Reinsurance



The Company ceded 100% of the risks associated with
its credit life and accident insurance written during 2007 and 2006 through
coinsurance agreements with various companies.  The Company administers the
ceded credit life and accident insurance for an agreed-upon fee.  During 2007
and 2006, the Company received $351,752 and $494,703, 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, 2007 and 2006 were $13,434,280 and
$14,404,596, respectively.  Additionally, unearned premium reserves were reduced
by $12,982,282 and $13,503,847 at December 31, 2007 and 2006, 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 Life Insurance Company (Cayman) Ltd.  Benefit reserves ceded
to Scottish and included in the amounts recoverable from reinsurers approximated
$29,253,000 and $30,670,000 at December 31, 2007 and 2006, 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:



2007
			
			2006Premiums ceded
			$
			13,303,976
			$
			12,817,430Premiums assumed
			
			3,561,983
			
			3,827,529Commission and expense
			allowances
			
			5,347,884
			
			5,078,452Benefit recoveries
			
			7,444,652
			
			7,700,316




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.



---



ANNUAL MEETING



The 2008 meeting of shareholders of Kentucky
Investors is scheduled for 11:00 a.m. on May 8, 2008 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, Kentucky 40602-0717



(800) 422-2011, ext. 1009

(502) 209-1009