I was reacting to Jim's statement that ALL images just show up and are not blocked. Most of these are spam. If spam is turning up in the inbox, then the security level should be raised. If it's turning up in the Junk email folder, then things are working as designed and the message will not be displayed unless it's consciously opened, and the problem of displaying images doesn't arise.
He also wrote that this[I get an email with images and they're blocked unless I click "Show images"] works for all my accounts in Live Mail except my Hotmail account. It wasn't until after I'd posted that he wrote that I have this problem with all my IMAP accounts. That's moved the goalposts quite some distance away. It makes troubleshooting so much easier if the symptoms are described accurately to begin with.
It's worth pointing out that this setting applies only to external content. Images that are embedded in the message and transmitted with it are not external and will not be affected by the block. This is the likely scenario with a message from my GF.