Can you embed one video inside another?
I believe what you're looking for is an editor with basic picture-in-picture (PiP) capabilities. For full and total control (including getting the "background" video to pause), I'd recommend Adobe Premiere Pro. A lot of simple editors (like iMovie, Windows Movie Maker, or even Adobe Premiere Elements) might allow for some very basic PiP, but usually nothing more than letting you put a second video in a corner.

Premiere Pro (or, better yet, any modern NLE of its caliber) will let you stack videos into "layers" on a single timeline, letting you place a "smaller" video "in front of" (or "on top of", from a layers standpoint) the full frame.