Life and health insurance companies must be allowed to test applicants for exposure to the AIDS virus or face the prospect of financial ruin, one of the country's leading insurance executives said yesterday.

"It is a survival issue for us. We have to test for AIDS," said E. James Morton, chairman of John Hancock Mutual Life Insurance Co. "If we're not allowed to in any particular jurisdiction, we just have to go out of business there."

Morton made his remarks during a luncheon meeting with reporters and editors of The Washington Post, in which he disclosed that John Hancock plans to become the latest in a stream of insurance companies to stop writing policies in the District because of its law prohibiting insurers from testing applicants for exposure to acquired immune deficiency syndrome.

The testing issue has become important to the insurance industry because it faces millions of dollars of potential claims related to AIDS. In an effort to screen out potential sufferers, many companies have begun blood tests to see if applicants have been exposed to the AIDS virus.

But critics have charged that the practice is discriminatory toward high-risk groups, including gay men, Haitians and intravenous drug abusers. The District, California and Wisconsin have barred insurers from AIDS testing, while other states are considering such a prohibition. In the District, several dozen companies have reacted to the ban by pulling out of individual life and health insurance.

Morton said yesterday that AIDS is essentially uninsurable -- and that companies would face staggering financial losses if they are not permitted to test. Even under best-case scenarios, he said, at least 20 percent of the people who test positive will develop AIDS, which means that out of 1,000 people, roughly 200 can be expected to die within 10 years -- or 30 times the firm's normal mortality rate, Morton said.

"There's just no way that an insurance company can survive under those rates," said Morton, who said the company refuses to cover applicants who test positive.

In the District, Hancock received $5.5 million worth of premiums from selling individual life insurance policies in 1986. Morton said Hancock has delayed leaving the District in part because it didn't want to upset negotiations with the Massachusetts insurance commissioner, who has been developing a policy on testing. But the company is planning to leave within "a month or two" it fears being approached by a raft of people carrying the virus.

"You can't be last on the block or you'll get everyone," Morton said.