iMac - "This disk has S.M.A.R.T. errors." What to do?

The drive is failing and it is only going to get worse. (SMART failure always means bad news.) Replacing the internal drive of an iMac is an adventure, removing the iMac glass is the first step which involves using suction cups to lift the glass which is held in place with magnets and it will place stress on the crack. Depending on how big it already is the crack could get larger. The uneven lighting is another concern. Frankly, given what you've described and the fact it is now 8-9 years old I'd not waste any money on getting the drive replaced.

You have USB 2 ports - pretty useless for booting/running a computer. You have firewire 800 ports which are good. A few years back I put an SSD into a FW 800 enclosure and used that to boot my iMac for another 18 months before retiring it. FW enclosures aren't cheap, here's a link to a decent one but I'd recommend you get the optional AC adaptor if you decide to go with it. The good news is that this won't be money wasted. The drive also has a USB 3 port so you can continue to use it when you replace the current iMac.

So you are looking at $80 for an enclosure and $50-$120 for a drive depending on whether you choose a rotational or an SSD. The SSD will give you better performance and if you choose rotational look for a 7200RPM drive. Taking it to a shop for the drive replacement would cost roughly the same and you'd wind up with a drive you couldn't conveniently get to if/when the iMac dies.

Personally I would not invest any more money into it.

You can however, setup and startup from an external drive while your saving up for a new Mac.

https://www.google.com/search?make+external+hard+drive+bootable+start+up+from+external+hard+drive+mac

While booting to an external drive is an option, my guess is the failing internal drive will sooner or later begin to affect performance especially during boot or waking from sleep as the system tries to communicate with the failing drive. The clicking noises are likely to continue and get worse.

I'm not personally familiar with this iMac, but the backlight issue could be either a partially defective Inverter Board or the LCD Panel itself. My guess is the inverter board, but I'm not sure if this is a replaceable part or not on this iMac.

Removing the glass on a 27" iMac will likely make the crack even worse. It is hard to say whether you will be able to piece it together to make it usable again.

SSDs are affordable, but any non-Apple drive installed in the later iMacs either needs a special SATA adapter to provide the necessary temperature sensor or you need to use a fan control app to control the fans since they will run fast & loud without the Apple drive. You also need to carefully choose the SSD.

If I were you, I would boot into Internet Recovery Mode using Cmd + Opt + R and have Disk Utility secure erase the hard drive so it zeroes everything out. This may or may not work since the drive is in extremely bad condition and it will likely take a long time to finish if it is successful. Normally this procedure will take several hours on a good drive 1TB drive, but a drive in this condition it could take days. My guess is it will error out or completely kill the drive before it finishes.

The computer is talking to you and you are not listening, it's saying "I'm dying please let me go."

In short the computer is 9 model years old now and due to be replaced. It's not worth anything so putting money into it does not make a great deal of sense. By the way, I'm writing this from my 9 model year old iMac. When it dies, it's getting replaced.

I/O errors are Input/Output errors (hence the I/O) and it basically means that the computer and OS are unable to successfully communicate with the drive or finish its commands. Once OSX mentions a SMART error, the drive is practically dead so this is not a surprising result. I like to have people zero their drives so no private information is left on them when the drive or computer is disposed.