UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549








FORM 10-Q






QUARTERLY
REPORT

Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934



For the
quarterly period ended September 30, 2010






000-01999

(Commission file
number)



INVESTORS
HERITAGE CAPITAL CORPORATION

(Exact Name of
Registrant as Specified in its Charter)



KENTUCKY
			
			61-6030333(State
			or other jurisdiction of incorporation or organization)
			
			(I.R.S.
			Employer Identification Number)






200 Capital
Avenue, P.O. Box 717

Frankfort,
Kentucky 40602

(Address of
principal executive offices)



(502) 223-2361

(Registrant's
telephone number, including area code)








Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.



Yes [X]   No [  ]



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).



Yes [  ]    No
[  ]



Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.



Large accelerated filer   
[  ]                                                                                      
Accelerated filer   [  ]

Non-accelerated filer      [  ] (Do not check if a
smaller reporting company)   Smaller reporting company  [X]



Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).



Yes [  ]   No [X]





---



Securities registered pursuant to Section 12(g) of the Act:



Common Capital Stock par value $1.00 per share

(Title of Class)



Number of outstanding shares as of November 12 , 2010 -
1,151,817.276



---



CONTENTS





PART I -- FINANCIAL INFORMATIONPageITEM 1.
			Condensed Consolidated Financial Statements
			4ITEM 2.
			Management's Discussion and Analysis of Financial
			Condition and Results of Operations
			21ITEM 4T.
			Controls and Procedures
			30PART II -- OTHER INFORMATIONITEM 1.
			Legal Proceedings
			31ITEM 2.
			Unregistered Sales of Equity Securities and Use of
			Proceeds
			31ITEM 3.
			Defaults Upon Senior Securities
			31ITEM 4.
			(Removed and Reserved)
			31ITEM 5.
			Other Information
			31ITEM 6.
			Exhibits
			31SIGNATURES
			
			32EXHIBIT 31.1
			
			33EXHIBIT 31.2
			
			35EXHIBIT 32
			
			37




---



PART I -- FINANCIAL INFORMATION




ITEM
1.  Condensed Consolidated Financial Statements



INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited)



September 30,
			
			December 31,ASSETS
			
			2010
			
			2009Investments:Securities available-for-sale, at fair
			value:Fixed maturities (amortized cost:
			$293,802,668 and $282,864,572)
			
			$   321,776,088
			
			$   295,242,583Equity securities (cost: $3,877,775 and
			$4,063,905)
			
			4,339,010
			
			4,223,604Mortgage loans on real estate
			
			20,407,218
			
			20,692,866Policy loans
			
			6,971,288
			
			6,923,418Other long-term investments
			
			1,037,889
			
			1,026,604Short-term investments
			
			245,001
			
			-Total investments
			
			354,776,494
			
			328,109,075Cash and cash equivalents
			
			4,177,886
			
			5,730,782Accrued investment income
			
			3,623,950
			
			4,013,402Due premiums
			
			3,727,735
			
			3,613,278Deferred acquisition costs
			
			17,446,267
			
			18,703,379Value of business acquired
			
			921,356
			
			12,968Leased property under capital leases
			
			104,598
			
			143,653Property and equipment
			
			1,626,536
			
			1,746,849Cash value of company-owned life insurance
			
			8,758,833
			
			8,671,833Other assets
			
			394,251
			
			312,852Amounts recoverable from reinsurers
			
			44,358,402
			
			47,521,019$   439,916,308
			
			$   418,579,090LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESPolicy liabilities:Benefit reserves
			
			$   348,965,170
			
			$   343,935,852Unearned premium reserves
			
			8,834,973
			
			10,543,520Policy claims
			
			1,588,261
			
			1,582,684Liability for deposit-type contracts
			
			2,750,173
			
			2,742,986Reserves for dividends and endowments and
			other
			
			584,916
			
			425,419Total policy liabilities
			
			362,723,493
			
			359,230,461Deferred federal income tax liability
			
			9,973,112
			
			4,285,842Obligations under capital leases
			
			94,314
			
			147,644Notes payable
			
			2,519,909
			
			3,070,584Accrued pension liability
			
			3,560,860
			
			4,304,257Other liabilities
			
			2,660,301
			
			1,865,423Total liabilities
			
			381,531,989
			
			372,904,211STOCKHOLDERS' EQUITYCommon stock (shares issued:  1,151,817 and
			1,141,767)
			
			1,151,817
			
			1,141,767Paid-in surplus
			
			8,801,514
			
			8,716,135Accumulated other comprehensive income
			
			14,928,776
			
			4,495,103Retained earnings
			
			33,502,212
			
			31,321,874Total stockholders' equity
			
			58,384,319
			
			45,674,879$   439,916,308
			
			$   418,579,090






See notes to consolidated financial statements.



4



---



INVESTORS
HERITAGE CAPITAL CORPORATION

Condensed
Consolidated Income Statements (Unaudited)



Quarter Ended
			
			Nine Months EndedSeptember 30,
			
			September 30,2010
			
			2009
			
			2010
			
			2009REVENUEPremiums and other considerations
			$  15,509,466
			
			$   9,987,378
			
			$  35,523,293
			
			$  30,705,939Premiums ceded
			(2,386,476)
			
			(1,644,520)
			
			(5,979,077)
			
			(6,239,601)Net premiums earned
			13,122,990
			
			8,342,858
			
			29,544,216
			
			24,466,338Investment income, net of expenses
			4,293,465
			
			4,327,540
			
			12,808,588
			
			13,111,084Net realized investment gains (losses) on
			investments:Total other-than-temporary impairment
			losses
			(225,632)
			
			-
			
			(225,632)
			
			(977,830)Portion of loss recognized inother comprehensive income
			-
			
			-
			
			-
			
			-Other net realized investment gains
			1,292,720
			
			709,595
			
			1,870,450
			
			820,849Net realized investment gains (losses) on
			investments
			1,067,088
			
			709,595
			
			1,644,818
			
			(156,981)Other income
			379,881
			
			327,706
			
			1,984,219
			
			837,164Total revenue
			18,863,424
			
			13,707,699
			
			45,981,841
			
			38,257,605BENEFITS AND EXPENSESDeath and other benefits
			7,349,254
			
			6,082,136
			
			23,270,784
			
			22,450,114Guaranteed annual endowments
			110,407
			
			113,712
			
			376,578
			
			390,087Dividends to policyholders
			103,160
			
			101,702
			
			362,799
			
			359,037Increase in benefit reserves and unearned
			premiums
			6,156,589
			
			2,908,195
			
			8,570,540
			
			4,456,912Acquisition costs deferred
			(1,194,623)
			
			(1,031,266)
			
			(3,485,347)
			
			(3,504,120)Amortization of deferred acquisition costs
			1,420,144
			
			1,282,590
			
			4,118,688
			
			3,900,989Commissions
			634,618
			
			639,803
			
			1,872,270
			
			1,784,707Other insurance expenses
			2,403,139
			
			2,249,348
			
			7,865,581
			
			7,864,333Total benefits and expenses
			16,982,688
			
			12,346,220
			
			42,951,893
			
			37,702,059INCOME BEFORE FEDERALINCOME TAXES
			1,880,736
			
			1,361,479
			
			3,029,948
			
			555,546PROVISION (BENEFIT) FORFEDERAL INCOME TAXESCurrent
			285,158
			
			196,876
			
			344,543
			
			368,932Deferred
			298,866
			
			173,274
			
			480,816
			
			(217,601)584,024
			
			370,150
			
			825,359
			
			151,331NET INCOME
			$   1,296,712
			
			$      991,329
			
			$   2,204,589
			
			$      404,215BASIC AND DILUTED NETINCOME PER SHARE
			$            1.13
			
			$            0.88
			
			$            1.92
			
			$            0.36DIVIDENDS PER SHARE
			$                  -
			
			$                  -
			
			$            0.13
			
			$                  -




See notes to
condensed consolidated financial statements.



5



---



INVESTORS
HERITAGE CAPITAL CORPORATION

Condensed
Consolidated Statements of Stockholders' Equity (Unaudited)



AccumulatedOther
			
			
			
			TotalCommon
			
			Paid-in
			
			Comprehensive
			
			Retained
			
			Stockholders'Stock
			
			Surplus
			
			Income (Loss)
			
			Earnings
			
			EquityBALANCE, JANUARY 1, 2009
			$1,120,686
			
			$8,705,492
			
			$(2,542,413)
			
			$30,169,195
			
			37,452,960Cumulative effect of a change inaccounting principle
			-
			
			-
			
			(272,157)
			
			272,157
			
			-Comprehensive income:Net income
			-
			
			-
			
			-
			
			404,215
			
			404,215Change in net unrealized appreciationon available-for-sale securities
			-
			
			-
			
			8,594,147
			
			-
			
			8,594,147Change in unrealized pension benefits
			-
			
			-
			
			276,800
			
			-
			
			276,800Change in fair value of hedging instrument
			-
			
			-
			
			3,553
			
			-
			
			3,553Total comprehensive income
			
			
			
			
			
			
			
			
			9,278,715Issuances of common stock, net
			15,068
			
			32,406
			
			-
			
			298,021
			
			345,495BALANCE, SEPTEMBER 30, 2009
			$1,135,754
			
			$8,737,898
			
			$ 6,059,930
			
			$31,143,588
			
			$
			47,077,170BALANCE, JANUARY 1, 2010
			$1,141,767
			
			$8,716,135
			
			$ 4,495,103
			
			$31,321,874
			
			$
			45,674,879Comprehensive income:Net income
			-
			
			-
			
			-
			
			2,204,589
			
			2,204,589Change in net unrealized appreciationon available-for-sale securities
			-
			
			-
			
			10,190,682
			
			-
			
			10,190,682Change in unrealized pension benefits
			-
			
			-
			
			240,633
			
			-
			
			240,633Change in fair value of hedging instrument
			-
			
			-
			
			2,358
			
			-
			
			2,358Total comprehensive income
			
			
			
			
			
			
			
			
			12,638,262Cash dividends
			-
			
			-
			
			-
			
			(149,364)
			
			(149,364)Issuances of common stock, net
			10,050
			
			85,379
			
			-
			
			125,113
			
			220,542BALANCE, SEPTEMBER 30, 2010
			$1,151,817
			
			$8,801,514
			
			$ 14,928,776
			
			$33,502,212
			
			$
			58,384,319




See notes to
condensed consolidated financial statements.



6





---



INVESTORS
HERITAGE CAPITAL CORPORATION

Condensed
Consolidated Statements of Cash Flows (Unaudited)



Nine Months Ended September 30,2010
			
			
			2009NET CASH PROVIDED BY OPERATING ACTIVITIES
			
			
			$    10,788,527
			
			
			$     5,338,467INVESTING ACTIVITIESSecurities available-for-sale:Purchases
			
			
			(49,689,061)
			
			
			(57,518,256)Sales and maturities
			
			
			40,309,087
			
			
			54,004,491Other investments:Cost of acquisitions
			
			
			(2,572,742)
			
			
			(684,008)Sales and maturities
			
			
			2,554,961
			
			
			2,088,419Net additions to property and equipment
			
			
			(106,030)
			
			
			(244,724)NET CASH USED IN INVESTING ACTIVITIES
			
			
			(9,503,785)
			
			
			(2,354,078)FINANCING ACTIVITIESReceipts from universal life policies
			credited topolicyholder account balances
			
			
			4,507,176
			
			
			5,265,003Return of policyholder account balances on
			universal life policies
			
			
			(6,865,317)
			
			
			(7,473,290)Payments on notes payable
			
			
			(2,602,663)
			
			
			(2,624,171)Proceeds from notes payable
			
			
			2,051,988
			
			
			1,500,130Dividends paid
			
			
			(149,364)
			
			
			-Issuances of common stock, net
			
			
			220,542
			
			
			345,495NET CASH USED IN FINANCING ACTIVITIES
			
			
			(2,837,638)
			
			
			(2,986,833)DECREASE IN CASH AND CASH EQUIVALENTS
			
			
			(1,552,896)
			
			
			(2,444)Cash and cash equivalents at beginning of
			period
			
			
			5,730,782
			
			
			2,819,257CASH AND CASH EQUIVALENTS AT END OF PERIOD
			
			
			$     4,177,886
			
			
			$     2,816,813




See notes to
consolidated financial statements.



7





---



INVESTORS
HERITAGE CAPITAL CORPORATION



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30,
2010

(Unaudited)



NOTE A - Nature of Operations

Investors Heritage Capital Corporation 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 98% of Investors Heritage Capital's consolidated revenue is
generated by Investors Heritage Life.



Our principal 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.



NOTE B - Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter and nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2009, as
included in our Annual Report on Form 10-K.



The preparation of financial statements in conformity
with U.S. generally accepted accounting principles 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.



Management has evaluated all events subsequent to
September 30, 2010 through the date that these financial statements have been
issued.



NOTE C - New Accounting Pronouncements

In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements ("ASU 2010-06").  The new guidance requires entities to
separately disclose information relative to transfers in and out of Levels 1 and
2 in the fair value hierarchy.  Additionally, ASU 2010-06 requires separate
presentation of transfers in, transfers out, purchases, sales, issuances and
settlements of Level 3 investments in the tabular reconciliation of Level 3
activity.  ASU 2010-06 also clarifies the level of disaggregation for which fair
value measurements should be disclosed and requires that information about input
and valuation techniques be disclosed for Level 2 and Level 3 assets and
liabilities.  The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009,



8



---



except for the disclosures about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years.  We adopted this
guidance effective for the first quarter of 2010.



NOTE D - Investments

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



Gross
			
			GrossSeptember 30, 2010
			Amortized
			
			Unrealized
			
			Unrealized
			
			FairCost
			
			Gains
			
			Losses
			
			ValueFixed maturity securities:U.S. government obligations
			$    36,684,549
			
			$    3,278,693
			
			$                -
			
			$   39,963,242States and political subdivisions
			37,999,178
			
			3,235,208
			
			1,940
			
			41,232,446Corporate
			146,254,728
			
			14,852,252
			
			88,346
			
			161,018,634Foreign
			19,355,788
			
			2,811,293
			
			119,590
			
			22,047,491Asset-backed securities
			5,765,323
			
			625,861
			
			-
			
			6,391,184Mortgage-backed securities (MBS):Commercial MBS
			8,066,471
			
			492,468
			
			-
			
			8,558,939Residential MBS
			39,676,631
			
			2,887,521
			
			-
			
			42,564,152Total fixed maturity securities
			293,802,668
			
			28,183,296
			
			209,876
			
			321,776,088Equity securities:U.S. agencies
			552,800
			
			-
			
			-
			
			552,800Mutual funds
			2,106,380
			
			293,398
			
			28,696
			
			2,371,082Nonredeemable corporate preferred
			990,000
			
			-
			
			30,000
			
			960,000Corporate common stock
			228,595
			
			226,533
			
			-
			
			455,128Total equity securities
			3,877,775
			
			519,931
			
			58,696
			
			4,339,010Total
			$  297,680,443
			
			$  28,703,227
			
			$       268,572
			
			$ 326,115,098Gross
			
			GrossDecember 31, 2009
			Amortized
			
			Unrealized
			
			Unrealized
			
			FairCost
			
			Gains
			
			Losses
			
			ValueFixed maturity securities:U.S. government obligations
			$    41,307,066
			
			$    1,462,195
			
			$       162,272
			
			$   42,606,989States and political subdivisions
			28,801,843
			
			648,736
			
			248,612
			
			29,201,967Corporate
			133,614,471
			
			7,542,864
			
			670,350
			
			140,486,985Foreign
			20,423,453
			
			1,678,736
			
			308,899
			
			21,793,290Asset-backed securities
			6,243,205
			
			370,862
			
			112,098
			
			6,501,969Mortgage-backed securities (MBS):Commercial MBS
			7,032,973
			
			49,376
			
			116,868
			
			6,965,481Residential MBS
			45,441,561
			
			2,255,003
			
			10,662
			
			47,685,902Total fixed maturity securities
			282,864,572
			
			14,007,772
			
			1,629,761
			
			295,242,583Equity securities:U.S. agencies
			552,800
			
			-
			
			-
			
			552,800Mutual funds
			2,066,879
			
			249,598
			
			57,202
			
			2,259,275Nonredeemable corporate preferred
			990,000
			
			-
			
			150,310
			
			839,690Corporate common stock
			454,226
			
			224,933
			
			107,320
			
			571,839Total equity securities
			4,063,905
			
			474,531
			
			314,832
			
			4,223,604Total
			$  286,928,477
			
			$  14,482,303
			
			$    1,944,593
			
			$ 299,466,187




9





---

The following table summarizes,
for all securities in an unrealized loss position as of the balance sheet dates,
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.



September 30, 2010
			
			December 31, 2009Gross
			
			Number
			
			
			
			Gross
			
			NumberEstimated
			
			Unrealized
			
			of
			
			Estimated
			
			Unrealized
			
			ofFair Value
			
			Loss
			
			Securities
			
			Fair Value
			
			Loss
			
			SecuritiesFixed Maturities:Less than 12 months:U.S. government obligations
			
			$                -
			
			$              -
			
			-
			
			$   8,696,858
			
			$    162,272
			
			5States and political subdivisions
			
			998,060
			
			1,940
			
			1
			
			8,770,601
			
			197,072
			
			10Corporate
			
			2,209,700
			
			3,747
			
			1
			
			9,157,525
			
			123,638
			
			9Commercial MBS
			
			-
			
			-
			
			-
			
			975,464
			
			27,495
			
			1Residential MBS
			
			-
			
			-
			
			-
			
			998,540
			
			10,662
			
			1Greater than 12 months:States and political subdivisions
			
			-
			
			-
			
			-
			
			948,460
			
			51,540
			
			1Corporate
			
			1,917,320
			
			84,599
			
			2
			
			8,683,320
			
			546,712
			
			10Foreign
			
			855,200
			
			119,590
			
			1
			
			1,662,130
			
			308,899
			
			2Asset-backed securities
			
			-
			
			-
			
			-
			
			493,212
			
			112,098
			
			2Commercial MBS
			
			-
			
			-
			
			-
			
			2,939,812
			
			89,373
			
			3Total fixed maturities
			
			5,980,280
			
			209,876
			
			5
			
			43,325,922
			
			1,629,761
			
			44Equities:Less than 12 months:Nonredeemable corporate preferred
			
			960,000
			
			30,000
			
			1
			
			-
			
			-
			
			-Mutual funds
			
			568,631
			
			28,696
			
			1
			
			-
			
			-
			
			-Corporate common stock
			
			-
			
			-
			
			-
			
			229,439
			
			107,320
			
			1Greater than 12 months:Nonredeemable corporate preferred
			
			-
			
			-
			
			-
			
			839,690
			
			150,310
			
			1Mutual funds
			
			-
			
			-
			
			-
			
			1,022,159
			
			57,202
			
			2Total equities
			
			1,528,631
			
			58,696
			
			2
			
			2,091,288
			
			314,832
			
			4Total
			
			$   7,508,911
			
			$    268,572
			
			7
			
			$ 45,417,210
			
			$ 1,944,593
			
			48




As of September 30, 2010, all of
the above fixed maturity securities individually had a fair value to cost ratio
equal to or greater than 87% and the equity securities noted above had a fair
value to cost ratio of over 95%.  As of December 31, 2009, all of the above
fixed maturity securities had a fair value to cost ratio equal to or greater
than 80% and the equity securities noted above had a fair value to cost ratio of
over 68%.  At September 30, 2010 and December 31, 2009, the Company's fixed
maturity securities were 99.0% and 97.7% investment grade as rated by Standard &
Poor's, respectively.



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 severity of the decline in value, the credit worthiness of the
issuer, and the coupon and/or dividend payment history of the issuer.  The
Company also assesses whether it intends to sell or whether it is more likely
than not that it may be required to sell the security prior to its recovery in
value.  For any fixed maturity securities that are other-than-temporarily
impaired, the Company determines the portion of the other-than-temporary
impairment that is credit-related and the portion that is related to other
factors. The credit-related portion is the difference between the expected
future cash flows and the amortized cost basis of the fixed maturity security,
and that difference is charged to earnings. The non-credit-related portion
representing the remaining difference to fair value is recognized in other
comprehensive income (loss). Only in the case of a credit-related impairment
where management has the intent to sell the security, or it is more likely than
not that it will be required to sell the security before recovery of its cost



10



---



basis, is a fixed maturity
security adjusted to fair value and the resulting losses recognized in realized
gains (losses) in the consolidated statements of income.  Any
other-than-temporary impairments on equity securities are recorded in the
consolidated statements of income in the periods incurred as the difference
between fair value and cost.



As of September 30, 2010, the
Company recognized an other-than-temporary impairment for its Farmers Capital
Bank Corporation common stock holding due to the severity and length of the
decline in market value.  This impairment generated a total pre-tax impairment
charge of $225,632.  The Company expects to continue to hold this stock;
however, no information can be documented to support the recovery in value of
the stock in the near term.  The Company experienced no other-than-temporary
impairments beyond the Farmers Capital Bank impairment during the quarter or
nine months ended September 30, 2010.  During the second quarter of 2009, the
Company impaired certain CIT and Alcoa bonds generating a total impairment
charge of $977,830.  Those bonds were sold during the third quarter of 2009.



During the second quarter of
2010, the Company sold its $4,000,000 par value Lehman Holdings bonds that were
previously impaired in 2008.  This sale generated a pre-tax gain of $171,105
that was recognized in the financial statements in the second quarter of 2010.



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 (depreciation) had been realized.



September 30,
			
			December 31,2010
			
			2009Net unrealized appreciation onavailable-for sale securities
			$      28,434,652
			
			$      12,537,710Adjustment to deferred acquisition costs
			(1,163,261)
			
			(539,494)Deferred income taxes
			(9,517,209)
			
			(4,434,716)Net unrealized appreciation onavailable-for sale securities
			$      17,754,182
			
			$        7,563,500




The amortized cost and fair
value of fixed maturity securities at September 30, 2010, 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
			$        14,226,182
			
			$        14,679,411Due after one year through five years
			73,923,652
			
			80,198,418Due after five years through ten years
			94,849,938
			
			105,684,894Due after ten years
			63,059,794
			
			70,090,274Due at multiple maturity dates
			47,743,102
			
			51,123,091Total
			$      293,802,668
			
			$      321,776,088




Proceeds for the quarters ended
September 30, 2010 and 2009 from sales and maturities of investments in
available-for-sale securities were $22,530,232 and $27,272,705, respectively. 
Gross gains of $1,304,398 and $978,863 and gross losses of $11,678 and $269,268
were realized on those sales during the quarters ended September 30, 2010 and
2009, respectively.  Proceeds for the nine months ended September 30, 2010 and
2009 from sales and maturities of investments in available-for-sale securities
were $40,309,087 and $54,004,491, respectively.  Gross gains of $1,886,727 and
$1,105,215 and gross losses of $16,277 and $1,262,196 were realized on those
sales during the nine month periods ended September 30, 2010 and 2009,
respectively.



11



---



Presented below is investment
information, including the accumulated quarter and year-to-date change in net
unrealized investment gains or losses.  Additionally, the table shows the change
in net unrealized investment gains (losses) and the amount of realized
investment gains (losses) on fixed maturities and equity securities for the
quarters and nine months ended September 30, 2010 and 2009.



Quarter Ended
			
			Nine Months EndedSeptember 30,
			
			September 30,2010
			
			2009
			
			2010
			
			2009Change in unrealizedinvestment gains:Available-for-sale:Fixed maturities
			$     4,922,121
			
			$     9,083,994
			
			$   15,595,409
			
			$   12,656,766Equity securities
			371,290
			
			129,924
			
			301,536
			
			398,657Realized investment gains (losses):Available-for-sale:Fixed maturities
			$     1,270,617
			
			$        709,595
			
			$     1,848,347
			
			$       (156,981)Equity securities
			(203,529)
			
			-
			
			(203,529)
			
			-




Major categories of net
investment income are summarized as follows:



Quarter Ended September 30,
			
			Nine Months Ended September 30,2010
			
			2009
			
			2010
			
			2009Fixed maturities
			$        3,929,533
			
			$        3,999,087
			
			$      11,776,333
			
			$      12,010,567Mortgage loans on real estate
			396,112
			
			356,406
			
			1,142,614
			
			1,166,386Other
			194,621
			
			192,015
			
			570,045
			
			594,0054,520,266
			
			4,547,508
			
			13,488,992
			
			13,770,958Investment expenses
			226,801
			
			219,968
			
			680,404
			
			659,874$        4,293,465
			
			$        4,327,540
			
			$      12,808,588
			
			$      13,111,084




NOTE E -- Fair Values of Financial Instruments

Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date.  We also consider the impact on fair value of a significant
decrease in volume and level of activity for an asset or liability when compared
with normal activity.



The
Company holds fixed maturities and equity securities that are measured and
reported at fair market value on the balance sheet.  The Company determines the
fair market values of its financial instruments based on the fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.  The standard
describes three levels of inputs that may be used to measure fair value, as
follows:



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



Level 2 - Observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. The Company's Level 2 assets and liabilities include
fixed maturities with quoted prices that are traded less frequently than
exchange-traded instruments or assets and liabilities whose value is determined
using a



12



---



pricing
model with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. This category
generally includes U.S. Government and agency mortgage-backed fixed maturities
and corporate fixed maturities.



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



The Company has categorized its financial
instruments, based on the priority of the inputs to the valuation technique,
into the three-level fair value hierarchy.  If the inputs used to measure the
financial instruments fall within different levels of the hierarchy, the
categorization is based on the lowest level input that is significant to the
fair value measurement of the instrument.  A review of fair value hierarchy
classifications is conducted on a quarterly basis. Changes in the valuation
inputs, or their ability to be observed, may result in a reclassification for
certain financial assets or liabilities. Reclassifications impacting Level 3 of
the fair value hierarchy are reported as transfers in/out of the Level 3
category as of the beginning of the quarter in which the reclassifications
occur.



13



---



The following table presents the
Company's fair value hierarchy for those financial instruments measured at fair
value on a recurring basis as of September 30, 2010 and December 31, 2009,
respectively.



September 30, 2010Level 1
			
			Level 2
			
			Level 3
			
			TotalFixed maturities:U.S. government obligations
			$                  -
			
			$   39,963,242
			
			$                  -
			
			$   39,963,242States and political subdivisions
			-
			
			41,232,446
			
			-
			
			41,232,446Corporate
			-
			
			161,018,634
			
			-
			
			161,018,634Foreign
			-
			
			22,047,491
			
			-
			
			22,047,491Asset-backed securities
			-
			
			6,391,184
			
			-
			
			6,391,184Mortgage-backed securities:Commercial MBS
			-
			
			8,558,939
			
			-
			
			8,558,939Residential MBS
			-
			
			42,564,152
			
			-
			
			42,564,152Total fixed maturities
			$                  -
			
			$ 321,776,088
			
			$                  -
			
			$ 321,776,088Equity securities:U.S. agencies
			$        552,800
			
			$                  -
			
			$                  -
			
			$        552,800Mutual funds
			2,371,082
			
			-
			
			-
			
			2,371,082Nonredeemable corporate preferred
			-
			
			-
			
			960,000
			
			960,000Corporate common stock
			111,128
			
			-
			
			344,000
			
			455,128Total equity securities
			$     3,035,010
			
			$                  -
			
			$     1,304,000
			
			$     4,339,010December 31, 2009Level 1
			
			Level 2
			
			Level 3
			
			TotalFixed maturities:U.S. government obligations
			$                  -
			
			$   41,831,989
			
			$        775,000
			
			$   42,606,989States and political subdivisions
			-
			
			29,201,967
			
			-
			
			29,201,967Corporate
			-
			
			135,913,379
			
			4,573,606
			
			140,486,985Foreign
			-
			
			21,793,290
			
			-
			
			21,793,290Asset-backed securities
			-
			
			6,065,114
			
			436,855
			
			6,501,969Mortgage-backed securities:Commercial MBS
			-
			
			6,965,481
			
			-
			
			6,965,481Residential MBS
			-
			
			47,685,902
			
			-
			
			47,685,902Total fixed maturities
			$                  -
			
			$ 289,457,122
			
			$     5,785,461
			
			$ 295,242,583Equity securities:U.S. agencies
			$        552,800
			
			$                  -
			
			$                  -
			
			$        552,800Mutual funds
			2,259,275
			
			-
			
			-
			
			2,259,275Nonredeemable corporate preferred
			839,690
			
			-
			
			-
			
			839,690Corporate common stock
			229,439
			
			-
			
			342,400
			
			571,839Total equity securities
			$     3,881,204
			
			$                  -
			
			$        342,400
			
			$     4,223,604




At September 30, 2010, Level 3 financial instruments
consisted of one nonredeemable corporate preferred stock and one common stock,
where trading has been limited.  At December 31, 2009, Level 3 financial
instruments consisted of four corporate fixed maturities, one U.S. government
obligation, one asset-backed security, one corporate redeemable preferred stock
and one common stock, where trading has been limited.  The fair values for these
securities were primarily determined through the use of non-binding broker
quotes and internal models using unobservable assumptions about market
participants.  Fair values for Level 1 and Level 2 assets are primarily based on
quoted prices in the market obtained via pricing services, which use observable
inputs in developing such rates.



14



---



The following table provides a summary of changes in fair
value of our Level 3 financial instruments for the three and nine month periods
ended September 30, 2010 and 2009, respectively.



Quarter Ended September 30, 2010U.S.
			
			
			
			Asset-
			
			Nonredeemable
			
			CorporateGovernment
			
			
			
			Backed
			
			Corporate
			
			CommonObligations
			
			Corporate
			
			Securities
			
			Preferred
			
			Stock
			
			TotalBeginning balance
			$  1,046,280
			
			$ 4,884,956
			
			$              -
			
			$                       -
			
			$    344,000
			
			$ 6,275,236Transfers into Level 3
			-
			
			-
			
			-
			
			1,032,810
			
			-
			
			1,032,810Transfers out of Level 3
			(1,046,280)
			
			(4,866,256)
			
			-
			
			-
			
			-
			
			(5,912,536)Total gains or losses:
			
			
			
			
			
			
			
			
			
			
			-Included in earnings
			-
			
			9,056
			
			-
			
			-
			
			-
			
			9,056Included in othercomprehensive income
			-
			
			(7,356)
			
			-
			
			(72,810)
			
			-
			
			(80,166)Net purchases (sales)
			-
			
			(20,400)
			
			-
			
			-
			
			-
			
			(20,400)Ending balance
			$               -
			
			$              -
			
			$              -
			
			$              960,000
			
			$    344,000
			
			$ 1,304,000Quarter Ended September 30, 2009U.S.
			
			
			
			Asset-
			
			Nonredeemable
			
			CorporateGovernment
			
			
			
			Backed
			
			Corporate
			
			CommonObligations
			
			Corporate
			
			Securities
			
			Preferred
			
			Stock
			
			TotalBeginning balance
			$     999,700
			
			$ 6,191,597
			
			$ 1,614,960
			
			$                       -
			
			$    342,400
			
			$ 9,148,657Transfers into Level 3
			148,974
			
			-
			
			-
			
			-
			
			-
			
			148,974Transfers out of Level 3
			-
			
			-
			
			(1,093,513)
			
			-
			
			-
			
			(1,093,513)Total gains or losses:
			
			
			
			
			
			
			
			
			
			
			-Included in earnings
			-
			
			-
			
			-
			
			-
			
			-
			
			-Included in othercomprehensive income
			66,930
			
			459,048
			
			(10,079)
			
			-
			
			-
			
			515,899Net purchases (sales)
			1,879,076
			
			(819,103)
			
			(35,935)
			
			-
			
			-
			
			1,024,038Ending balance
			$  3,094,680
			
			$ 5,831,542
			
			$    475,433
			
			$                       -
			
			$    342,400
			
			$ 9,744,055




15



---



Nine Months Ended September 30, 2010U.S.
			
			
			
			Asset-
			
			Nonredeemable
			
			CorporateGovernment
			
			
			
			Backed
			
			Corporate
			
			CommonObligations
			
			Corporate
			
			Securities
			
			Preferred
			
			Stock
			
			TotalBeginning balance
			$     775,000
			
			$ 4,573,606
			
			$    436,855
			
			$                       -
			
			$    342,400
			
			$ 6,127,861Transfers into Level 3
			-
			
			-
			
			-
			
			1,032,810
			
			-
			
			1,032,810Transfers out of Level 3
			(1,821,280)
			
			(4,866,256)
			
			(411,077)
			
			-
			
			-
			
			(7,098,613)Total gains or losses:
			
			
			
			
			
			
			
			
			
			
			-Included in earnings
			-
			
			9,056
			
			-
			
			-
			
			-
			
			9,056Included in othercomprehensive income
			49,092
			
			416,462
			
			11,923
			
			(72,810)
			
			1,600
			
			406,267Net purchases (sales)
			997,188
			
			(132,868)
			
			(37,701)
			
			-
			
			-
			
			826,619Ending balance
			$               -
			
			$              -
			
			$              -
			
			$              960,000
			
			$    344,000
			
			$ 1,304,000Nine Months Ended September 30, 2009U.S.
			
			
			
			Asset-
			
			Nonredeemable
			
			CorporateGovernment
			
			
			
			Backed
			
			Corporate
			
			CommonObligations
			
			Corporate
			
			Securities
			
			Preferred
			
			Stock
			
			TotalBeginning balance
			$  2,037,998
			
			$ 4,588,512
			
			$ 1,599,571
			
			$                       -
			
			$    342,400
			
			$ 8,568,481Transfers into Level 3
			-
			
			-
			
			-
			
			-
			
			-
			
			-Transfers out of Level 3
			(1,463,796)
			
			-
			
			(1,093,513)
			
			-
			
			-
			
			(2,557,309)Total gains or losses:
			
			
			
			
			
			
			
			
			
			
			-Included in earnings
			-
			
			-
			
			-
			
			-
			
			-
			
			-Included in othercomprehensive income
			48,997
			
			416,277
			
			75,383
			
			-
			
			-
			
			540,657Net purchases (sales)
			2,471,481
			
			826,753
			
			(106,008)
			
			-
			
			-
			
			3,192,226Ending balance
			$  3,094,680
			
			$ 5,831,542
			
			$    475,433
			
			$                       -
			
			$    342,400
			
			$ 9,744,055




The
Company had one nonredeemable preferred stock that transferred from Level 2 to
Level 3 during the quarter ended September 30, 2010 (transferred from Level 1 to
Level 3 for the nine months ended September 30, 2010).  Trading for this
preferred stock has become more limited, which restricts the use of Level 1 and
Level 2 inputs into pricing.  The Company has one U.S. government obligation and
four corporate securities which transferred from Level 3 to level 2 during the
quarter ended September 30, 2010.  Additionally, the Company had one U.S.
government obligation which transferred from Level 3 to Level 2 during the
quarter ended March 31, 2010 as well as one asset-backed security which
transferred from Level 3 to Level 2 during the quarter ended June 30, 2010. 
Transfers in and/or (out) of Level 3 are primarily attributable to changes in
the availability of market observable information and re-evaluation of the
observability of pricing inputs.



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



The following disclosure
contains the estimated fair values of financial instruments, as of September 30,
2010 and December 31, 2009.  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.



16



---



September 30, 2010
			
			December 31, 2009Carrying
			
			Fair
			
			Carrying
			
			FairAmount
			
			Value
			
			Amount
			
			ValueAssets:Fixed maturities
			$   321,776,088
			
			$   321,776,088
			
			$   295,242,583
			
			$   295,242,583Equity securities
			4,339,010
			
			4,339,010
			
			4,223,604
			
			4,223,604Mortgage loans on real estate:Commercial
			20,381,169
			
			20,808,619
			
			20,663,961
			
			20,630,855Residential
			26,049
			
			27,576
			
			28,905
			
			30,590Policy loans
			6,971,288
			
			6,971,288
			
			6,923,418
			
			6,923,418Other long-term investments
			1,037,889
			
			1,037,889
			
			1,026,604
			
			1,026,604Short-term investments
			245,001
			
			245,001
			
			-
			
			-Cash and cash equivalents
			4,177,886
			
			4,177,886
			
			5,730,782
			
			5,730,782Accrued investment income
			3,623,950
			
			3,623,950
			
			4,013,402
			
			4,013,402Cash value of company-ownedlife insurance
			8,758,833
			
			8,758,833
			
			8,671,833
			
			8,671,833Liabilities:Policyholder deposits(Investment-type contracts)
			$     51,447,128
			
			$     53,811,157
			
			$     51,172,871
			
			$     48,680,467Policy claims
			1,588,261
			
			1,588,261
			
			1,582,684
			
			1,582,684Obligations under capital leases
			94,314
			
			94,314
			
			147,644
			
			147,644Notes payable
			2,519,909
			
			2,496,388
			
			3,070,584
			
			2,962,395




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



Fixed maturities and equity
securities:  The fair values for fixed maturities and equity securities
(including redeemable preferred stocks) are based on the principles previously
discussed.



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



Cash and cash equivalents,
policy loans, accrued investment income, other long-term investments and
short-term investments:  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 value for liabilities under investment-type insurance contracts
(accumulation annuities) is calculated using a discounted cash flow approach. 
Cash flows were projected using actuarial assumptions and discounted to the
valuation date using risk-free rates adjusted for credit risk and the
nonperformance risk of the liabilities.



The fair values for insurance
contracts other than investment-type contracts are not required to be disclosed.



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



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



17



---



NOTE F - Earnings per Share and Stock-Based
Compensation

Earnings per share of common stock were
computed based on the weighted average number of common shares outstanding
during each period. The weighted average number of shares outstanding for the
quarters ended September 30, 2010 and 2009 were 1,151,817 and 1,126,157,
respectively.  The weighted average number of shares outstanding for the nine
month periods ended September 30, 2010 and 2009 were 1,146,593 and 1,131,731,
respectively.



The Company's previously issued stock
options and option plan terminated on September 24, 2009.  No options were
exercised under the plan.  Accordingly, there was no compensation expense
recognized for the three or nine month periods ended September 30, 2010.  We
recognized no change in the compensation expense relative to the previously
outstanding options for the quarter ended September 30, 2009, and we recognized
a decrease in compensation expense relative to the previously outstanding
options of $213,938 for the nine months ended September 30, 2009.



NOTE G - Segment Data

We operate in four segments as shown in
the following table. All segments include both individual and group insurance.
Identifiable revenues and expenses are assigned directly to the applicable
segment. Net investment income is generally allocated to the insurance and the
corporate segments in proportion to policy liabilities and stockholders' equity,
respectively. Realized gains and losses, including realized losses as a result
of other-than-temporary impairments, are allocated to the Corporate and Other
segment.  Investors Heritage Financial revenue and income associated with credit
administrative services is assigned to that segment, with any remaining revenue
and income assigned to the Corporate and Other segment.  Fees relative to third
party administrative services are also allocated to the Corporate and Other
segment.  Results for the parent company, Investors Heritage Printing, At Need
Funding and Heritage Funding, after elimination of intercompany amounts, are
allocated to the Corporate and Other segment.



Quarter Ended
			
			Nine Months EndedSeptember 30,
			
			September 30,2010
			
			2009
			
			2010
			
			2009Revenue:Preneed and burial products
			$   14,812,680
			
			$   10,076,652
			
			$   34,480,388
			
			$    29,715,427Traditional and universal life products
			2,458,765
			
			2,465,125
			
			7,480,264
			
			7,476,965Credit insurance products andadministrative services
			68,462
			
			66,355
			
			203,890
			
			243,451Corporate and other
			1,523,517
			
			1,099,567
			
			3,817,299
			
			821,762$   18,863,424
			
			$   13,707,699
			
			$   45,981,841
			
			$    38,257,605Pre-tax income (loss) from operations:Preneed and burial products
			$          26,012
			
			$        482,607
			
			$       (506,823)
			
			$         163,701Traditional and universal life products
			265,175
			
			56,724
			
			69,738
			
			90,142Credit insurance products andadministrative services
			54,582
			
			49,165
			
			134,404
			
			155,100Corporate and other
			1,534,967
			
			772,983
			
			3,332,629
			
			146,603$     1,880,736
			
			$     1,361,479
			
			$     3,029,948
			
			$         555,546




Included in Corporate and other above and
as a component of other income in the consolidated income statement for the nine
months ended September 30, 2010 is $902,676 of net life insurance proceeds
received under a company-owned life insurance policy upon the death of a former
member of management.



18



---



NOTE H - Federal Income Taxes

The provision for federal income taxes is
based on the estimated effective annual tax rate. Deferred 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. Income before federal income taxes differs from taxable income
principally due to the dividends-received deduction; the 404(k) dividend
deduction; the small life insurance company tax deduction; and non-taxable
effects of company-owned life insurance premiums, cash value growth, and death
benefit proceeds.



We file U.S. federal income tax returns
and income tax returns in various state jurisdictions. Our 2007 through 2009
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, should such a circumstance arise, it is our
policy to classify any interest and penalties (if applicable) as income tax
expense in the financial statements.



NOTE I - Comprehensive Income

The components of comprehensive income, net of related
federal income taxes, are as follows:



Quarter Ended
			
			Nine Months EndedSeptember 30,
			
			September 30,2010
			
			2009
			
			2010
			
			2009Total net unrealized gainsarising during the period
			$     4,456,432
			
			$     6,562,204
			
			$   11,835,500
			
			$     8,437,166Less: Net realized investment gains (losses)
			1,067,088
			
			709,595
			
			1,644,818
			
			(156,981)Net unrealized gains
			3,389,344
			
			5,852,609
			
			10,190,682
			
			8,594,147Change in unrealized pension benefits
			111,461
			
			92,267
			
			240,633
			
			276,800Change in fair value of hedging instrument
			-
			
			1,133
			
			2,358
			
			3,553Net income
			1,296,712
			
			991,329
			
			2,204,589
			
			404,215Total comprehensive income
			$     4,797,517
			
			$     6,937,338
			
			$   12,638,262
			
			$     9,278,715




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.



NOTE J - Employee Benefit Plans

We sponsor a noncontributory defined
benefit 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 the components of our net
periodic benefit cost:



Quarter Ended
			
			Nine Months EndedSeptember 30,
			
			September 30,2010
			
			2009
			
			2010
			
			2009Service cost
			$        134,853
			
			$          94,516
			
			$        323,995
			
			$        283,548Interest cost
			277,725
			
			235,174
			
			752,955
			
			705,521Expected return on plan assets
			(243,022)
			
			(170,573)
			
			(726,752)
			
			(511,717)Recognized net loss
			168,880
			
			139,798
			
			364,595
			
			419,394Net periodic benefit cost
			$        338,436
			
			$        298,915
			
			$        714,793
			
			$        896,746




19



---



We previously disclosed in our financial
statements for the year ended December 31, 2009 that we expected to contribute
$972,000 to our pension plan in 2010. As of September 30, 2010, $729,000 had
been contributed. Based on the funding requirements contained in our recently
completed actuarial valuation, we anticipate increasing our contribution over
the remainder of 2010 to contribute an additional $321,000 to fund our pension
plan.



NOTE K - Acquisitions

During the third quarter of 2010, the
Company assumed the covered obligations of the Texas Life, Accident, Health, and
Hospital Service Insurance Guaranty Association related to a block of preneed
policies originally issued by Texas Memorial Life Insurance Company.  The
Company received cash in exchange for assuming the covered obligations.  The
Company received cash of $2,898,037 and assumed liabilities totaling $3,819,393,
with an asset recognized for value of business acquired of $921,356.  The value
of business acquired is being amortized in proportion with the unreleased profit
generated on the underlying life insurance policies.  The Company has not yet
recognized any amortization expense associated with the value of business
acquired.



NOTE L - Notes Payable

The Company renewed the Investors
Heritage Capital Corporation Line of Credit and the At Need Funding Line of
Credit during the third quarter of 2010.  The Investors Heritage Capital
Corporation Line of Credit remains for $150,000 with a new maturity date of
September 27, 2011.  The At Need Funding Line of Credit remains for $2,000,000
with a new maturity date of September 29, 2011.  Interest is paid on both notes
monthly at the prime rate, with a floor of 3.25%.





20



---



ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations



GENERAL



Investors Heritage Capital Corporation is
incorporated under the laws of the Commonwealth of Kentucky and wholly owns
Investors Heritage Life Insurance Company, a life insurance company also
incorporated under the laws of the Commonwealth of Kentucky. Investors Heritage
Capital also wholly owns Investors Heritage Financial Services Group, Inc., a
Kentucky insurance marketing company; Investors Heritage Printing, Inc., a
Kentucky printing company that provides printing to Investors Heritage Life and
other unaffiliated parties; is the sole member of At Need Funding, LLC, a
Kentucky 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.



Investors Heritage Life offers a full
line of life insurance products including, but not limited to, whole life, term
life, single premium life, multi-pay life and annuities. Investors Heritage
Life's primary lines of business are insurance policies and annuities utilized
to fund preneed funeral contracts, credit life and credit disability insurance,
and term life and reducing term life sold through financial institutions.



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



During the fourth quarter of
2008, we introduced the Heritage Final Expense II product as a replacement for
our original Heritage Final Expense product sold in the final expense markets. 
The Heritage Final Expense II product incorporates the 2001 CSO table while also
improving the marketability and profitability of the product.



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



Investors Heritage Life continues to
market its third-party administrative ("TPA") services as an additional revenue
source.  We currently have eight TPA clients for which we provide tailored
services to meet each client's individual business needs. We have been able to
perform services for these clients using our existing in-house resources.



During the third quarter of 2010, we
assumed the covered obligations of the Texas Life, Accident, Health, and
Hospital Service Insurance Guaranty Association related to a block of preneed
policies originally issued by Texas Memorial Life Insurance Company.  We
received cash in exchange for assuming the covered obligations.  We received
cash of $2,898,037 and assumed liabilities totaling $3,819,393, with an asset
recognized for value of business acquired of $921,356.  The value of business
acquired is being amortized in proportion with the unreleased profit generated
on the underlying life insurance policies.  We have not yet recognized any
amortization expense associated with the value of business acquired.



21



---



Our primary uses of cash are ongoing
operating expenses, debt service and dividend payments. Our principal sources of
cash are the dividends paid to us by Investors Heritage Life and Investors
Heritage Financial in addition to rent paid by Investors Heritage Life under the
terms of a building lease. Investors Heritage Life's principal sources of cash
are proceeds received from the sale of life insurance policies, administrative
service fees and investment income, including realized gains (losses), less
interest credited and benefits to policyholders and expenses.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The discussion and analysis of our
financial condition and results of operations are 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, we then determine the proper treatment for the
other-than-temporary impairment.  For fixed maturities, the amount of any
other-than-temporary impairment related to a credit loss is recognized in
earnings and reflected as a reduction in the cost basis of the security; and the
amount of any other-than-temporary impairment related to other factors is
recognized in other comprehensive income (loss) with no change to the cost basis
of the security.  For equity securities, the amount of any other-than-temporary
impairment is recognized in earnings and reflected as a reduction in the cost
basis of the security.



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, if a change occurs in
our intent to sell temporarily impaired securities prior to maturity or recovery
in value, or if it becomes more likely than not that we will be required to sell
such securities prior to recovery in value or maturity, a future impairment
charge could result.



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



22



---



Deferred Acquisition Costs

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



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



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



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.  Additionally, funding of plan
liabilities is sensitive to changes in investment returns as well as regulatory
changes, which can significantly impact our financial statements.



New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board
issued Accounting Standards Update No. 2010-06, Improving Disclosures about
Fair Value Measurements ("ASU 2010-06").  The new guidance requires entities
to separately disclose information relative to transfers in and out of Levels 1
and 2 in the fair value hierarchy.  Additionally, ASU 2010-06 requires separate
presentation of transfers in, transfers



23



---



out,
purchases, sales, issuances and settlements of Level 3 investments in the
tabular reconciliation of Level 3 activity.  ASU 2010-06 also clarifies the
level of disaggregation for which fair value measurements should be disclosed
and requires that information about input and valuation techniques be disclosed
for Level 2 and Level 3 assets and liabilities.  The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the rollforward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years.  We adopted this guidance effective for the first quarter of
2010.



Refer to Note E to our condensed consolidated financial
statements for the disclosures required by the above-mentioned new guidance.



INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES



Investments

Investors Heritage Life maintains a
sound, conservative investment strategy. At September 30, 2010, 90.7% of
invested assets consisted of fixed income securities compared to 90.0% at
December 31, 2009. At September 30, 2010 and December 31, 2009, Investors
Heritage Life's fixed income investments were 99.0% investment grade as rated by
Standard & Poor's.



As of September 30, 2010, we recognized an
other-than-temporary impairment for our Farmers Capital Bank Corporation common
stock holding due to the severity and length of the decline in market value. 
While the issuer has had positive earnings during 2010 and has shown financial
progress, the stock has continued to show no improvement in value, and had been
in an unrealized loss position in excess of 12 months.  We expect to continue to
hold this stock; however, no information can be documented to support the
recovery in value of the stock in the near term.  This impairment generated a
total pre-tax impairment charge of $225,632.  We experienced no
other-than-temporary impairments beyond the Farmers Capital Bank impairment
during the quarter or nine months ended September 30, 2010.  During the second
quarter of 2009, we impaired certain CIT and Alcoa bonds generating a total
impairment charge of $977,830.  Those bonds were sold during the third quarter
of 2009.



None of Investors Heritage Life's fixed
income assets are in default and there has been no material change in the
distribution of its fixed income portfolio.



During the second quarter of 2010, we
sold our previously impaired $4,000,000 investment in Lehman Brothers bond
holdings, recognizing a gain of $171,105.  This transaction generated a
substantial realized tax loss of approximately $3,096,000.  We have recognized
capital gains in our bond portfolio in order to utilize this tax loss.  This
strategy in conjunction with carryback provisions will facilitate the use of
this tax loss.  Accordingly, use of the Lehman tax loss has been considered in
the effective income tax rate used in our current period tax provision.



We continuously monitor the investment risk
within our portfolio, including the risk associated with subprime lending with
our CMO investments.  As of September 30, 2010, we have only one CMO, with a
fair value of approximately $64,000, which has any level of direct subprime
exposure.  Based on our analysis, we believe this investment is of high quality
and expect no losses as a result of the current subprime concerns.



Additionally, Investors Heritage Life engages in commercial
and residential mortgage lending, with approximately 99.9% of these investments
being in commercial properties. All mortgage loans are either originated
in-house or through two mortgage brokers, and all loans are secured by first
mortgages on the real estate.  Loan to value ratios of 80% or less and debt
service coverage from existing cash flows of 115% or higher are generally
required.  We minimize credit risk in our mortgage loan portfolio through



24



---



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.  At September 30, 2010, 5.8% of invested assets
consisted of mortgage loans compared to 6.3% at December 31, 2009. We anticipate
maintaining a similar to slightly higher percentage of mortgage loans to total
invested assets into the near future. As of September 30, 2010, Investors
Heritage Life had no non-performing mortgage loans, which would include loans
past due 180 days or more, loans in process of foreclosure, restructured loans
and real estate acquired through foreclosure.



Liquidity and Capital Resources

Premiums, which include mortality and
expense charges, investment income and administrative service fees are Investors
Heritage Life's primary sources of cash flow used to meet short-term and
long-term cash requirements.



Investors Heritage Life's short-term
obligations consist primarily of policyholder benefits and operating expenses.
Investors Heritage Life has historically been able to meet these obligations out
of operating cash, premiums and investment income.



Investors Heritage Life's principal
long-term obligations are fixed contractual obligations incurred in the sale of
its life insurance products. The premiums charged for these products are based
on conservative and actuarially sound assumptions as to mortality, persistency
and interest. We believe these assumptions will produce revenues sufficient to
meet our future contractual benefit obligations and operating expenses, and
provide an adequate profit margin.



Investors Heritage Life's conservative
approach in the product development area and the strength and stability of its
fixed income and mortgage loan portfolios provide adequate liquidity both in the
short-term and the long-term.



Investors Heritage Capital's principal
sources of cash flow are rental income and dividends from its subsidiaries.
Investors Heritage Capital's principal long-term obligations are payments on
long-term debt.



During the second quarter of 2010, we
experienced a death covered by one of our company-owned life insurance
policies.  We recognized a reduction in our asset for the return of the cash
value of approximately $535,000 and an additional non-taxable death benefit
above the cash value of approximately $903,000.



During the second quarter of 2010, we
made our final payment on our previously outstanding bank note.  Additionally,
during the third quarter of 2010, we renewed the Investors Heritage Capital
Corporation Line of Credit and the At Need Funding Line of Credit.  The
Investors Heritage Capital Corporation Line of Credit remains for $150,000 with
a new maturity date of September 27, 2011.  The At Need Funding Line of Credit
remains for $2,000,000 with a new maturity date of September 29, 2011.  Interest
is paid on both notes monthly at the prime rate, with a floor of 3.25%.  Beyond
these renewals, we have entered into no new debt agreements during the nine
months ended September 30, 2010.



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 September 30, 2010, we are in compliance with
all debt covenant requirements.



Based on the funding requirements
contained in our recently completed pension actuarial valuation, we anticipate
increasing our contribution to our pension plan over the remainder of 2010 by
$78,000 more than the contribution anticipated at the beginning of 2010. 
Likewise, we expect our contributions to our pension plan to increase above
recent levels in future years due to recently adopted pension funding
requirements and their full implementation.



25



---



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



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
Investors Heritage Capital.



RESULTS OF OPERATIONS



Overview

Premiums earned (net of reinsurance) were
$13,122,990 for the third quarter of 2010 (an increase of 57.3% compared to the
third quarter of 2009) and $29,544,216 for the nine months ended September 30,
2010 (an increase of 20.8% compared to the corresponding period in 2009).  This
increase is predominantly due to the cash consideration received on the
acquisition of the Texas Memorial block of insurance policies.  Additionally,
our recent product offerings are performing well compared to prior products,
although current economic conditions continue to limit disposable income
typically used as a source for new sales in many of our markets.



Net investment income was $4,293,465 for
the third quarter of 2010 (a decrease of 0.8% compared to the third quarter of
2009) and $12,808,588 for the nine months ended September 30, 2010 (a decrease
of 2.3% compared to the corresponding period in 2009).  The fluctuating economic
environment continues to put significant pressure on new investment yields.



Net realized gains (losses) were
$1,067,088 and $1,644,818 for the three and nine month periods ended September
30, 2010, respectively, compared with $709,595 and ($156,981) for the three and
nine month periods ended September 30, 2009, respectively.  The large gains
realized in 2010 relate to those previously mentioned relating to the sale of
the Lehman bonds coupled with other gains taken to help offset the tax loss
associated with the Lehman bonds.  These gains taken were somewhat offset by the
impairment loss recognized on one of our corporate common stock during the third
quarter of 2010.  The loss during 2009 related to other-than-temporary
impairment charges relative to CIT and Alcoa bonds, which were sold during the
third quarter of 2009.



Other income was $379,881 for the third
quarter of 2010 (an increase of 15.9% compared to the third quarter of 2009) and
$1,984,219 for the nine months ended September 30, 2010 (an increase of 137%
compared to the corresponding period in 2009).  The 2010 income includes the
company-owned life insurance death benefits associated with one of our policies,
as previously discussed.  Additionally, our revenues received from our TPA
arrangements have significantly increased over the same period in the prior year
due to new relationships as well as expanded activity in one current
relationship.



Total revenue was $18,863,424 for the
third quarter of 2010 (an increase of 37.6% compared to the third quarter of
2009) and $45,981,841 for the nine months ended September 30, 2010 (an increase
of 20.2% compared to the corresponding period in 2009).



Total benefits and expenses were
$16,982,688 for the third quarter of 2010 (an increase of 37.6% compared to the
third quarter of 2009) and $42,951,893 for the nine months ended September 30,
2010 (an increase of 13.9% compared to the corresponding period in 2009).  This
increase is primarily driven by the increase in reserves for the liabilities
assumed in the acquisition of the Texas Memorial block of life insurance
policies during the third quarter of 2010.  Additionally, we have experienced
commission and reserve increases due to new sales, an increase in net
amortization of deferred acquisition costs and an increase in employee salary
expense.



26



---



After providing for federal income taxes,
our net income was $1,296,712 with net income per share of $1.13 for the third
quarter of 2010 as compared to net income of $991,329 and net income per share
of $0.88 for the third quarter of 2009.  Our net income for the nine months
ended September 30, 2010 was $2,204,589 with net income per share of $1.92 as
compared to net income of $404,215 and net income per share of $0.36 for the
nine months ended September 30, 2009.



We declared a dividend of $0.13 per share
on March 11, 2010 to shareholders of record on March 26, 2010.  This dividend
was paid on April 9, 2010.



Business Segments

We internally evaluate the performance of
our operations by the following four business segments:



Preneed and Burial Products include both
life and annuity products sold by funeral directors or affiliated agents to fund
prearranged funerals. Revenues for this segment were $14,812,680 for the third
quarter of 2010 (an increase of 47.0% compared to the third quarter of 2009) and
$34,480,388 for the nine months ended September 30, 2010 (an increase of 16.0%
compared to the corresponding period in 2009).  This increase is predominantly
due to the previously mentioned cash consideration received on the acquisition
of the Texas Memorial block of insurance policies in addition to the stronger
sales of our own policies, which were somewhat offset by lower investment
yields.  Pre-tax income (loss) from operations was $26,012 and ($506,823) for
the three and nine month periods ended September 30, 2010 as compared to
$482,607 and $163,701 for the three and nine month periods ended September 30,
2009.  The lower current year pre-tax income was driven by higher than
anticipated claims in this segment, crediting rate spread pressure due to lower
investment income yields and an increase in unit expenses.



Traditional and Universal Life Products
include traditional life and group life insurance products, certain annuities
and universal life products.  Revenues for this segment were $2,458,765 for the
third quarter of 2010 (a decrease of 0.3% compared to the third quarter of 2009)
and $7,480,264 for the nine months ended September 30, 2010 (an increase of less
than 0.1% compared to the corresponding period in 2009).  Revenues on this
segment are primarily derived from the sale of term insurance products through
banks, for which demand fluctuates along with economic conditions. While
consumer credit markets remain tight, our recent products have performed well. 
Pre-tax income from operations was $265,175 and $69,738 for the three and nine
month periods ended September 30, 2010 as compared to $56,724 and $90,142 for
the three and nine month periods ended September 30, 2009.  The decrease in
pre-tax income for the nine month period was primarily attributable to higher
than anticipated claims, the reduction in investment earnings over the
comparable period in the prior year and the current tight credit market,
although these factors have had less impact in the current quarter in comparison
to the comparable period in the prior year.



Credit Insurance Products and
Administrative Services include the marketing and administration of credit life
and credit accident and health insurance products. We reinsure 100% of the
related underwriting risk currently produced within this segment.  Accordingly,
revenue is generated primarily from servicing and administering the credit
business for our reinsurers. Because the revenue is fee-based, segment
performance is in direct relation to new premium production coupled with fees
generated as premiums are earned. Premium production within this segment is also
significantly affected by economic conditions within our credit markets,
particularly Kentucky.  Revenues for this segment were $68,462 for the third
quarter of 2010 (an increase of 3.2% compared to the third quarter of 2009) and
$203,890 for the nine months ended September 30, 2010 (a decrease of 16.3%
compared to the corresponding period in 2009).  Pre-tax income from operations
was $54,582 and $134,404 for the three and nine month periods ended September
30, 2010 as compared to $49,165 and $155,100 for the three and nine month
periods ended September 30, 2009.  These decreases in revenue and pre-tax income
for the nine month period are directly related to lower premium production
within this segment of the business due to current economic and lending
conditions, although this impact was lessened during the current quarter in
comparison to prior year.



27



---



Corporate and Other consists of corporate
accounts measured primarily by stockholders' paid-in capital, contributed
surplus, 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 TPA arrangements,
the impact of realized investment gains and losses, and other non-recurring
revenues.  Revenues for this segment were $1,523,517 and $3,817,299 for the
three and nine month periods ended September 30, 2010.  Pre-tax income from
operations was $1,534,967 and $3,332,629 for the three and nine month periods
ended September 30, 2010.  These amounts were significantly higher than prior
year amounts due to the current year realized gains taken, company-owned life
insurance proceeds and increase in fees generated from our TPA arrangements, as
previously discussed.  The prior year amounts were also impacted by the
other-than-temporary impairment charge recognized on the CIT and Alcoa bonds,
which were significantly larger than the current year other-than-temporary
impairment taken on Farmers Capital Bank common stock.



While we continue to expand the
operations of Investors Heritage Financial, Investors Heritage Printing, At Need
Funding and Heritage Funding, approximately 1% of our consolidated revenues were
generated by those subsidiaries. Approximately 12% of Investors Heritage
Financial's revenue for the nine months ended September 30, 2010 was derived
from the sale of Investors Heritage Life's credit insurance products. During the
first nine months of 2010, Investors Heritage Capital received dividends from
Investors Heritage Financial totaling $36,000 and received distributions from At
Need Funding of $38,000. We anticipate further dividend payments from Investors
Heritage Financial and distributions from At Need Funding during the remainder
of 2010.  Investors Heritage Capital also received dividends from Investors
Heritage Life of $188,940 during the first nine months of 2010.  We do not
anticipate further dividends from Investors Heritage Life during 2010.



Federal Income Taxes

The provision for federal income taxes is
based on the estimated effective annual tax rate. Deferred 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. Income before federal income taxes differs from taxable income
principally due to the dividends-received deduction; the 404(k) dividend
deduction; the small life insurance company tax deduction; and non-taxable
effects of company-owned life insurance premiums, cash value growth and death
benefit proceeds. Our effective tax rate was 31.1% and 27.2% for the three and
nine month periods ended September 30, 2010 compared with 27.2% for the three
and nine month periods ended September 30, 2009.



OFF-BALANCE SHEET ARRANGEMENTS



We have no off-balance sheet arrangements
as of September 30, 2010.



FORWARD LOOKING INFORMATION



We caution readers regarding certain
forward-looking statements contained in this report and in any other statements
made by us or on our behalf, 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 Investors Heritage Life's
products, investment spreads and yields, or our earnings and profitability.



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



28



---



could cause actual results to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf. 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 law 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 us 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.



29



---



ITEM 4T. Controls
and Procedures



As of the end of the period covered by
this Form 10-Q, we performed an evaluation, under the supervision and with the
participation of management, including our Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in this Quarterly Report on Form 10-Q. There have been
no significant changes in our internal controls or in other factors which could
significantly affect internal controls over financial reporting during this most
recent quarter or subsequent to the date we carried out our evaluation.



30



---



PART II -- OTHER INFORMATION




ITEM 1. Legal
Proceedings



Investors Heritage Capital is not
involved in any legal proceedings. From time to time Investors Heritage Life is
involved in litigation relating to claims arising out of its operations in the
normal course of business. As of November 12, 2010, Investors Heritage Life is
not a party to any legal proceedings, the adverse outcome of which, in
management's opinion, individually or in the aggregate, would have a material
adverse effect on our financial condition or results of operations.



ITEM 2. Unregistered Sales of Equity Securities and
Use of Proceeds



No share repurchases were made pursuant
to a publicly announced plan or program. All share repurchases were shares
tendered by original stockholders under our right of first refusal or by
employees as part of our 401(k) plan.



ITEM 3. Defaults Upon Senior Securities



None



ITEM 4. (Removed and Reserved)



ITEM 5. Other Information



None



ITEM 6. Exhibits



|31.1 & 31.2 | Certifications pursuant to
		Securities and Exchange Act Rule 13a-14(a)/15d-14(a), as adopted
		pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                            
|32.1        | Certifications Pursuant to 18
		U.S.C. Section 1350, as adopted pursuant to Section 906 of the
		Sarbanes-Oxley Act of 2002.                               



31



---



SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.



INVESTORS HERITAGE CAPITAL CORPORATIONBY: /s/Harry Lee Waterfield IIHarry Lee Waterfield IIDATE: November 12, 2010
			PresidentBY: /s/Raymond L. CarrRaymond L. CarrDATE: November 12, 2010
			Vice President - Chief
			Financial Officer




32



---

---