You can insert images inside an email message between sections of text.
Open a new email and start editing, Do a long tap on the email message and and choose "Format" from the popup menu. Then you will see the advanced formatting menu. Tap on the insert image button that looks like a mountain photo to choose images to insert into your email message.
You can choose the photo size when you choose the images to insert. (More details)

You can also paste images from other apps such as the Apple Photos app.

Once you have added the image you can pinch the image with two fingers to resize it. Double tap on the image to change the image file size.