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I will replace my original keylock/circuit breaker with a simple on off key switch and then add a resettable circuit breaker. I need to know if I should locate the breaker before the key switch or after it.

No reason to not locate it as close to the starter (battery) terminal as possible.

Curious if your car has stock wiring and components. If so, from this AEA drawing, it looks to me like the circuit breaker is a separate item and only protects the lights and a couple of other things. The ign sw only controls power to the coil assy and it along with the circuit breaker looks to be powered directly by the battery but after the battery voltage and current passes thru the ammeter. Placing a CB anywhere in that feed wire would kill power to the coil and engine would stop if the lights or anything else should present a problem. Protecting the ign sw and coil is fine if you want to do that but I would add a second breaker and split the circuit so one breaker tripping would only affect a part of the car.

I will not be using the original key/coil setup. I intend to replace it with a stand alone coil and a separate ignition key. I feel inserting a circuit breaker at point 1 or 2 or both as shown in my poor drawing. What do you think?

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On my cars I always wire in a master fuse before the terminal block/fusebox.

Then have each circuit individually fused.

This way the entire car is protected.

In that scenario, location #2 is appropriate.

A large capacity fuse or breaker would work at 2 but the caveat mentioned earlier exists as well as another possible issue in the way you want to wire things.. Referencing the AEA drawing, if for whatever reason a minor problem should occur in something like a light or cigar lighter and the single fuse or CB blows the engine would suddenly stop too. This might be inconvenient at best or worse, put you in a dangerous situation.

Before running the lights and anything else thru the key switch, I would also verify what amps they will be pulling and the capacity of the new key switch. Horns, cigar lighters, and headlights pull a lot of current. Most modern switch capacities are somewhat limited.

If you want to run everything thru the switch then after you verify the key switch can carry the required current if more than one item is on at a time I would place a fairly large capacity CB between the key switch and terminal block. To completely prevent the possible second issue, remove the coil feed from the terminal block and then run it thru another smaller capacity CB to connect directly to the key switch. If you do this, make sure the key switch is a type that has a separate ACC and IGN contact. BAT connects to ammeter, coil only to IGN and the terminal block to ACC.

Because the generator connects into the feed or BAT side of the key switch you might be in the clear but usually the issue is if you connect the coil to something the generator is providing voltage to, or feedback from somewhere else can power that connection, then even though the key switch is off you will not be able to turn off the engine. Without a second separately switched feed the voltage still being generated or some other feedback is being fed into the circuit and can keep powering the coil.