Yes, agree with PPs - you are not understanding this correctly.
If they are religious (or his parents are), a godparent is someone who will support the child in the way they grow in their religion and their relationship with God. Ideally, this person would also act as a sort of parental figure to the child, as a support and sounding board etc.
If they are not religious but are choosing to do a traditional godparent (DH's family are not religious but they take godparents very seriously, so we are in this category), a godparent is someone you would like to play an active role in your child's life, to support them and love them.
Neither scenario assumes the god parent would become the child's guardian. I and not particularly religious. My sister is. I am not a godparent to her children. I AM however, their legal guardian should anything happen to her and her DH.
I do understand why you might be upset. But not being godmother does not preclude you having a relationship with her children. And if his family have quite set roles for godparents, then I can understand that they might not feel you're in a position to have that type of relationship with this child. Certainly, in DH's family, this relationship is so important and now, years later, I appreciate it a lot - both of my DC get such a lot from their respective godparents (mostly).