I just saw this thread today and I just want to say that I really like the plan you have for this hack! Have you decided what to call it yet?
I also think it is nice that you are receiving feedback from Zelda II fans. I've beaten Zelda II many times and I love the game, though not as much as a kid due to how different it was from the original and getting pretty stuck right around that first major Death Mountain challenge to get the hammer. I would say though that first and foremost, unless you are trying to modify the existing game in a slight way to improve upon one aspect of it, I wouldn't worry about how close or how far you want to stray from the original mechanics of the game. People will be playing your "type" of hack to experience an all new way to play and an all new reason to play Zelda II again. So by that, I'd recommend going with whatever feels right to you.
Since you asked for opinions, even though I can appreciate the XP system of Zelda II, I never really "enjoyed" grinding. Most of the time I'd grind for a bit to cover some of the earlier levels that don't take much XP and then start completing Dungeons so that I could get a full level up by grabbing the crystal at the end maxing out the XP. I really think that taking that out of it and simply making more upgrades as far as items to seek out and explore would be much more interesting. You've already said that you will be expanding the world map, so there should be plenty more places to hide such items. Also, then you can have players really challenge themselves in extremely dangerous areas just to try and get to a weapon or armor upgrade that is meant for later in the game to try and achieve that reward early. In Ys for example, I *Always* risk my life in the mining cave where everything can one-shot me, in order to get one of the best shields in the game. I mean, why not? It's fun to challenge beyond what you are technically ready for!
As for Lives, I mean, sometimes Link just runs out of health and you need to count on those extra lives in order to keep going. If that were expanded into extra health instead of "chances" at completing the goal you've sought out starting at full-life each time, I'm pretty sure it will greatly change the flow of how Zelda II is laid out.
Take for example this as a scenario:
Link can take 8 hits before dying or needing to start curing as of hit number 7 as he crossed a bridge with floating poison bubbles and other flying enemies and maybe a axe thrower at the end of it. Normally, this would be really hard to complete and if you died, you'd have to "GitGud" a few times to pass it. That can be a fun challenge to overcome, or it could be rather annoying.
If this was changed into say a longer life meter or less damage taken to the lifebar, let's say he had 14 hits now, it's much, much more feasible to pass this trial with the option of getting hit 14 times before death, but that might make it too easy. Then again, the fact that you are having to cure yourself and if you die even once, you're journey is over and you have to start over at Zelda's sleeping shrine, so maybe it would balance out in the long run. It's hard to say until you've tested the difficulty of the enemy placement.
Good luck on your project! Can't wait to see new updates for it!