S/MIME usually requires a certificate from a provider like VeriSign or
Thawte. Another method might be is using Pretty Good Privacy (PGP). The
only weird thing is that both the sender and recipient have to agree on how
to establish the method of trust.
Or directly password protect the Word document itself ;-)
Other Office applications and document applications usually offer this
feature too or something similar.
If not, your WinRAR (or using another compression tool such as WinZIP or
7ZIP) workaround will work.
But to answer the OP's question directly;
You cannot password protect an email.
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