how to insert image

The "show image" option will display the image of the parent category you can select in the options, not the image of each category listed.

If you want to have the images you would have to use the type of layout div indeed.

Alternately, you can edit the code of the view in order to add the images. Go to Display->Views and search for the file listing_list of the view product. There you can use the code

echo $this->image->display(@$row->file_path,false,$this->escape($row->product_name));

echo $row->product_name;