Hi,
Thank you for writing to Microsoft Community Forums.
We appreciate your interest in the features of File History and System image Backup.
A system image is an exact copy of operating system. By default, a system image includes the drives required for Windows to run. It also includes Windows and your system settings, programs, and files. You can use a system image to restore the contents of your computer if your hard disk or computer ever stop working.
File History regularly backs up version of your files in the Documents, Music, Pictures, Videos and Desktop folders and the OneDrive files available offline on your PC. Over time, you'll have a complete history of your files. For example, if you want to restore an older version of a file (even if it wasn't deleted or lost), you can browse through a timeline, select the version you want, and restore it.
The main difference is the System image back up restores the entire OS along with files and settings, whereas File History is only restricted to file backup and there is no difference with the folders apart from the purpose.
You may also want to refer File History in Windows and Backup and Restore in Windows 10 for more details.
Regards,